Crisis in the waiting for Indias banks - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Crisis in the waiting for Indias banks 

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In this issue:
» M&M upbeat on future
» GM to draw the final curtains
» EPFOs to shell out returns of 8.5%
» Is highway development going to get a boost?
» ...and more!

00:00
 
Source: Trend
Stocks from the banking sector have been major beneficiaries of optimism that has been seen since the second week of March. Or what would justify that while the Sensex has gained by a strong 67% since March 9th, the BSE-Bankex is up a whopping 109%. While investors have rooted for stocks from the sector expecting that an economic upturn will be beneficial for the sector, the fact that is not being given much thought is the potential increase in banks' non-performing assets (NPA) over the next few quarters. At least, this is what the credit rating agency, CARE, believes, as it foresees the net NPAs of the Indian banking sector to triple from the current 1% of advances to 2.7-3% of advances by the end of FY11.

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As per the agency, given that delayed loan repayments are currently suppressed under the shadow of restructuring where banks are giving more time to companies to pay back their loans or are lowering interest rates to help companies pay back faster, they will emerge bad once the restructuring ends. Special mention has been given to the banks' retail lending (especially segments like credit cards and personal loans), where NPAs are likely to touch as high a level as 10-12%.

00:48
 
While banks will watch with caution the rising NPA levels as talked above, even rating agencies are watchful of Indian government's deteriorating finances. As per Moody's, if the new UPA government is unable to draw fiscal policies and push ahead with reforms, it will exert pressure on the country's foreign currency credit rating.

01:00
 
At the time of writing, M&M, India's largest UV and tractor manufacturer, was trading 8% higher on the bourses, emerging as one of the top gainers. We wonder whether the confidence that the top management oozed at yesterday's analyst meet has also rubbed off on the stock price. Indeed, the company has shown good character in coming out of the current downturn with minimum damage. While the core business of automotive managed to hold on plus even improve market share in certain segments, other ventures like holidays and IT also held up well. Although the financial services and auto components businesses did show some signs of fatigue, given the strength of the group, these should also be able to weather the downturn. All in all, the company looks well positioned to capture the India growth story over the medium to long term with its well entrenched position in several of the economy's high growth industries.

01:37
 
From M&M, an auto company that is all set to embark on a higher growth trajectory, let us move on to another, the one that is about to hit the ground and with a big thud at that. We are referring to the GM bankruptcy, the prospects of which are getting stronger by the day. Yes, you've heard that right. Curtains could be finally drawn on a company that represented the might of American manufacturing for most part of the last century. But wait. The famous GM badge will not become extinct. It's just that the company will cease to exist in its current avatar. The new GM that will come out from the bankruptcy proceedings, also called as chapter 11 will be much more leaner, without any significant debt and without any loss making assets, thus putting it in a very strong position vis-a-vis its rivals. Post the restructuring, the US Government is expected to have a 72.5% stake in the company, most of which will be sold in the next 6 to 18 months, once the company is able to stand on its own.

02:23
 
Leading business dailies have been reporting how certain ministers have either won, retained or lost their portfolios. One case in particular is of Mr. Kamal Nath being shifted out of the commerce ministry and being put in charge of the road transport and highways portfolio.

For a while now, the sector has been associated with delays and roadblocks. Just to give you an example - when the UPA government assumed office in 2004, only 25% construction activity of the 5,300 km Golden Quadrilateral highway project was pending. Five-years down the line, a part of the project is yet to be finished. However, given that the UPA government is likely to focus strongly on building and improving infrastructure in India, a result-oriented person such as Mr. Nath is maybe what the sector needed.

02:53
 
The workers who have parked their retirement money with the state-run Employees' Provident Fund Organisation (EPFO) have something to cheer about. This is because the EPFO will now be able to dole out a return of 8.5% to these workers in FY10; the credit for which belongs to the fund managers of ICICI, HSBC and Reliance who provided the much needed competition to SBI. These managers were given the mandate in September to manage the savings flowing into EPFO and as reported in the Mint, they earned returns of between 8.68% and 9.14% in FY09. The fact that competition induced SBI to bag the top honour obviously shows that this strategy paid off handsomely. Also, the EPFO, which earlier had to dip into its reserves to pay these workers, will now be able to give out these returns without the aid of reserves. Just goes to show that a bit of competition goes on to make a world of difference in terms of giving that extra push.

03:36
 
You may soon be able to place you equity orders even when you are on the move through your mobile phone. As per reports, the Securities and Exchange Board of India (SEBI) has proposed a framework for trading in securities through wireless technology which would include data cards and cell phones. The proposal by SEBI will ensure that the process is safe and secure for investors and once that is done investors may finally be able to use this convenient service to their benefit.

03:56
 
Wal-Mart formally enters the Indian markets by opening its first store tomorrow. But whether it would have an impact on the existing Indian players is a question many may be wondering. As the company has tied up with Bharti to set up this cash and carry (wholesale) business, it will not directly impact retailers. However, operations of regional wholesalers may be affected. In addition, domestic organised players who have entered into JVs with foreign players (or are outlining plans to get into the cash and carry business) will face stiff competition as well.

As the Indian retail sector is at a nascent stage, the existing players are still testing markets and trying different strategies to gain market share. With the entry of Wal-Mart, the scale and efficiency, technology, industry best practices, amongst others are expected to touch another level. However, one will have to wait and see how it eventually pans out.

04:30
 
The Indian markets ended the day on a strong note as the benchmark index, the BSE-Sensex ended the day with gains of around 330 points (2.3%), while the NSE-Nifty closed higher by about 110 points (2.6%). Stocks from the mid-cap and small-cap space also ended the day on a firm note with the BSE midcap and small cap indices ending higher by 2.4% and 3% respectively. Other Asian markets ended the day on a firm note while the European indices were trading in the green at the time of writing.

04:54  Today's investing mantra
"Charlie and I let our marketable equities tell us by their operating results-not by their daily, or even yearly, price quotations-whether our investments are successful. The market may ignore business success for a while, but eventually will confirm it" - Warren Buffett
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4 Responses to "Crisis in the waiting for Indias banks"

stephen john

Jun 3, 2009

i would appreciate if you could send me some feed back on the prospects of indian baning.
regards
stephen

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kailash C Tawri

Jun 2, 2009

The contents of Equitymaster daily report is have lot of worth. EM is providing very usefull information at first stage. I am really enjoying the report as its increasing my knowledge

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SUDHA SHETH

May 29, 2009

Article on crisi in waiting for indian banks very useful to guide our current investment interests.

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Alok Misra

May 29, 2009

All those countries who have been parking their Foreign Funds in US Treasury bonds are going to be in trouble because China/ Japan/ South Korea and certain EU countries could pull out of these bonds by late 2009. This means great fall for the dollar .
It total pull out takes place it wi;ll be major upheaval for the world economy. Currently the figure of bad debts in US is rising steadily and has grossed US four trillion
Dollar.It might go furthur as US has been funding its Governance and banking etc largely on inflow of foreign funds for a pretty long time. The Americans have lived a very lavish life at the cost of the Other nations.
This can not go on - if recovery does not come by the end of this year and it will not come at any price as seen- the Us will resort to protective policies forcing other nations to start selling Bonds.This selling of bonds could lower the dollar to Rs 25 - practically half of what it is today.I forsee this by year 2011 or so.
India should gear up itself for this scenario and now is the time to think of India/ only India and India Again.
Indian rise to world status will take place during this period and it is certainly will not be due to Policies
of this government!

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