Is this the <i>sanjeevani</i> for moribund infra sector? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is this the sanjeevani for moribund infra sector? 

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In this issue:
» How FMs are gaming the system during budget speeches?
» Is the Portugal banking crisis a sign of more worries to come?
» Gold prices rise amidst tensions in Portugal
» Government trounces middlemen to curb inflation
» ...and more!

Infrastructure is the fulcrum around which the growth of any economy revolves. And this year's Union Budget gave an unprecedented push to infrastructure with huge sums being allocated towards roads, ports, airports and urban housing.

The issue surrounding infra financing deadlock was also resolved. There was a long standing demand of the banking community to exempt them from maintaining cash reserve ratio (CRR) and statutory liquidity ratio (SLR) on funds raised to finance infra loans. CRR is the minimum amount of funds which banks have to keep with RBI. SLR is the minimum amount of funds which banks have to invest in government securities. Currently, CRR is 4% and SLR is 22.5%. Both are calculated on the net demand and time liabilities of a bank.

Exempting a bank from maintaining CRR and SLR would mean that they have more money to lend to infrastructure companies. As an example, let's assume that a bank raises Rs 100 to finance an infra project. As per the earlier guidelines, Rs 26.5 was effectively blocked in deposits with RBI and as government securities to meet CRR (4% of Rs 100) and SLR (22.5% of Rs 100) requirements respectively. So, banks had just Rs 73.5 to lend on every Rs 100 they raised to finance infra loans. However, now with the exemption of maintaining CRR and SLR, banks will have entire Rs 100 to lend. This gave a huge boost to bank stocks.

However, it seems that the euphoria amongst banks over this move will be short lived. To start with, RBI is planning to add riders to avail this exemption. The most important one being - banks can avail this exemption only if the loan asset is classified as healthy. The moment the loan slips into the non-performing asset (NPA) category, banks will have to set aside funds for CRR and SLR as usual. Also, the project appraisal process will become stringent for banks who want to avail such a facility. Such moves are planned to ensure that banks don't go overboard in infra lending.

We believe the move by the RBI to incorporate riders is justified. While infra financing definitely needed a boost, there was also a need to check unprecedented lending to such a high risk sector. In the past, too many banks lent aggressively to the infrastructure sector and their asset qualities suffered as a result. Hence, RBI was not too keen on providing the exemption. However, with the Finance Minister obliging on this demand to revive infra lending, RBI was quick to add riders.

This is where the role of RBI as a regulator should be applauded, we believe. Infrastructure is one of the sectors which have been classified as 'stressed'. As such, lending to this sector is full of risk. However, there was also a need to check the liquidity constraints infrastructure, as a sector, was facing.

To address that problem the FM did his job of providing exemption on CRR and SLR requirements. And the RBI was quick to jump in so as to ensure that it does not result in careless lending to junk projects. The move by RBI will ensure that the asset quality of banking system remains stress free. And the system does not tread the way of its western counterparts where seeds of sub-prime crisis were borne by careless lending to the real estate sector.

Should there be tight regulations on banks for infrastructure lending or should RBI give them the leeway they are craving for? Let us know in the Equitymaster Club or share your comments below.

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01:50  Chart of the day
The government has set itself a challenging task of reducing fiscal deficit to 4.1%, 3.6% and 3% of GDP for FY15, FY16 and FY17 respectively. One of the ways it intends to do so is though disinvestment. And in this regard, the target for FY15 has been set at an ambitious Rs 584 bn. Of this, Rs 434 bn is expected to come from the stake sale in public sector units, while the balance would be from the sale of the government's residual stake in erstwhile state-run companies.

Is the FY15 disinvestment target too ambitious?
BE= Budget Estimate

Readers would recall that the UPA had also relied heavily on disinvestment to reduce fiscal gap but was not entirely successful. As the economy slowed down and policy paralysis plagued the erstwhile UPA government, stock markets remained volatile. As a result, there was not much appetite for shares of public sector units. The Modi government is looking to correct this. And to start with has outlined a 10% stake sales in Coal India and NHPC. Not to mention 5% stake sale in SAIL, ONGC, PFC and REC. It will be interesting to see whether the current government is able to stick to the target it has set for itself. The one thing going for it is the buoyancy in the stock markets. Having said that, pricing for these issues will have to be reasonable if shareholders are to benefit from it in the longer run.

The Union Budget, besides getting some thumbs up, is also keeping critics busy. The Rs 2 bn outlay for the Statue of Unity has particularly come under sharp criticism. There is doubt that when the economy is under acute fiscal stress whether such outlays are rational. But more than that, the FM's attempt to dole out Rs 1 bn to several small projects is what has attracted the critics' ire. The insignificant allocations seem to evoke concerns that the projects may get deferred due to want of funds. Moreover, the allocation of such funds without laying responsibility for the completion of the projects may keep them half baked. The FM, just like his predecessors, can always seek redemption claiming that the allocated funds were never used. However, for the government to be growth oriented in the true sense, it needs to take project accountability very seriously. As we said earlier, Mr Jaitley's Budget relies more on excellent execution than good planning. And with accountability, the execution itself could falter!

It would not be an exaggeration to call the banking sector a pillar for a nation's economy. It is a key organ, any disturbances in which can have serious implications for an economy. Some of the worst financial crises in the global economic history find their origins in the mess within the banking and financial sector. While the financial crisis of 2008 is still haunting the global economy, a new one seems around the corner. With Portugal's biggest banks showing sign of crisis, a panic has gripped the entire European economy. The case in point here is Banco Espirito Santo. The trading of the bank has been suspended by Portugal's regulator as its share price crashed 17%. The event has exposed fault lines in the European banking system, sending tremors to the entire European economy. In response, the STOXX index of European lenders has declined by around 11% since early June and has fallen to lowest level this year. Further, as an article in Telegraph suggests, the yield on country's 10 year debt has come down. Greek, Italian and Spanish debts have been other casualties. And this is just the beginning we believe. We would not be surprised to see other major economies getting caught in the doom loop.

As opposed to view that majority market participants had, the volatility in stock prices on budget day was not entirely a factor of investors reading between the lines of the Finance Minister's speech. Rather, the negative sentiments during the second half of the day were largely to do with concerns propping up in Portugal. As discussed above, the poor health of Europe's banks have started to re-emerge.

But while the scenario in other parts of the world seems to be deteriorating, things back home are relatively stable. So how do external worries concern us? Well... to some extent it does due to the influential role of foreign institutional investors in Indian stock markets. As such, we believe the key way to hedge one's portfolio against all uncertainties such as the Euro banking crisis or the tensions in the Middle East is by lapping up gold. In fact on 10th July, gold closed at US$ 1,340 an ounce which was the highest level since mid-March 2014. As we have mentioned time and again, it would be a good idea to have about 5% to 10% of one's investible net worth parked in gold. While stocks do seem to be the flavour of the season, the party will not last forever.

Food inflation nears 10%. And that's giving sleepless nights to the Prime Minister. Not to forget the swelling prices were also one of the reasons for the UPA-led Congress party defeat in the elections. Modi government therefore does not wish to leave any stone unturned to avoid repeating the history. Hence, the Agriculture Produce Marketing Committee Act or APMC. This law aims to safeguard farmers from exploitation by rich landlords. It also requires selling all produce through regulated markets in most of the 29 states. Now that's quite important, as farmers are deprived of fair prices; bigger chunk of profits are pocketed by the middlemen as too many people in the supply chain (seeking their cuts) automatically amplifies price. Eventually the consumers face the brunt. Hence, Mr Modi aims at APMC Act. The Ministry is pushing states to allow farmers to sell their fruit and vegetables to anyone they want. In what could be termed as stand out proposition, allowing direct purchases would create a win-win situation. Not only will farmers enjoy a fair price for their goods, but also consumers will have to pay less. The baby steps towards battling sticky inflation have been initiated in the capital. But we certainly hope the state governments join the mission and play an enabling role too.

Majority of the global markets have underperformed during the week. Barring some markets in Asia, such as Brazil and Singapore that ended in the positive territory, all the other stock markets fell. However, some of the losses were covered up towards the end of the week.

The US market witnessed selling pressure in the week gone by. However, US equities changed their direction on Friday as the government posted a budget surplus for the month of June. This is on course to record the lowest annual deficit since 2008 and a good sign of improvement in the country's finances.

European equity markets suffered losses during the week, as Portugal' s largest listed lender, Banco Espirito Santo (BES), raised fears of a possible default and a return to the dark days of the Eurozone debt crisis. However, European markets too changed their direction on the fifth day of the week as expectations of the financial troubles of BES not spiralling into a euro-area banking crisis came about.

It was an eventful week for Indian stock markets. To begin with, the Railway budget pushed the indices lower. The Indian stock markets plunged by 500 points in a single day. The much awaited Union Budget 2014-15, too was declared later during the week. While Finance Minister Arun Jaitley, emphasised on the fiscal consolidation and took some good steps to bring about the revival in the economy, he failed to get a big thumbs up. The Budget lacked the path breaking reforms and impacted the Indian indices. The Indian markets touched the 15-week low levels. Among the global indices, BSE-Sensex was among the top loser for the week.

Performance during the week ended 11 July, 2014
Data Source: Equitymaster

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6 Responses to "Is this the sanjeevani for moribund infra sector?"


Jul 14, 2014

If Banks are not strict we will give rise to many more Vijay Mallyas'.



Jul 14, 2014

1. We can expect that the NRIs are not going to invest additional % in housing as the rupee is and will further strengthen as inflows from FII and other "hope investments - HI" might further strengthen the same and also due to REIT and CRR SLR exemption boosting fund raising activities by banks.
2. You can expect the prices of the housing to remain elevated for longer period of time when it should be going down. The entire pack of real estate tycoons are salivating on this move by FM and greed is back.
Only caveat here is the housing prices can come down drastically for a short period on price war as these companies have got a short window to sell their assets to procure more financing by clearing the books AND the other case in favor of lower housing prices for a short period is when the commercial real estate is going to get sold as recovery is perceived to be taking longer time than expected. This re balancing act can trigger more projects in housing than in commercial.
Early mover advantage in real estate space can be clearly seen. More weight can be seen towards land investments in urban and rural areas for housing- a segment sensitive to pricing and interest rates.


Prakash Basrur

Jul 12, 2014

RBI's intervention in India is a very wise step taken in the right direction in order to avoid further increase in the NPA's of banks in general and Public Sector banks in particular. Around 2007-08 the Infra companies floated IPO's and generated huge equity funds for themselves and , in spite of having that money , they cornered huge amounts of loan money from the Public sector banks ! Where has that money gone ? Into multitude fictitious smaller companies floated by the same big-name Infra companies amongst which the booty was dispersed ! This is very much likely to be repeated again this time if RBI does not do the stricter financial policing job ! Thanks to RBI we have not had USA like "sub-prime" financial balloon for bursting and ruining our hand-to-mouth economy ! It is the ethical strength of RBI governors like Subba Rao and now Raghuram Rajan that our economy has not collapsed like Greece or Italy !


hoshang dehnugara

Jul 12, 2014

rbi should not give free hand for lending to infracture, in fact bank should not be permitted and a cap should be fixed if at all permitted



Jul 12, 2014

I have not recieved any buy direction from your part. I hope the the newely selected stok details may forward to me to activate the share market


Sammir Naik

Jul 12, 2014

Industry such as Steel, Cement that form the core of Infrastructure Development will get a big boost once the Infrastructure spending starts in a big way.Both Cement and Steel have been laggards and now is the time for their revival.

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