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Easing of risk weights on loans given to MFIs and NBFCs
Economy, Market News, Markets - April 30, 2020

Lenders seek replacements for debt schemes

Lenders seek replacements for debt schemes

Debt mutual funds are the funds which are invested in instruments like treasury bills, certificate of deposits and c-papers. This instruments have fixed interest earnings with fixed tenure. Although, this interest is fixed for throughout the period of investment on the underlying asset. The main goal is to collect wealth through the interest earned and increase the overall investment value. Best debt scheme is decided on the basis of the credit rating given to them. If the credit rating is high. it means debt security have higher chances of paying the interest and principle during the time of maturity.

Debt schemes are usually taken by the investors and high network individual (HNI). They are risk averse and not ready to invest in equities. They choose debt funds according to their requirement for short to medium term. While investing in any scheme, investor considers points like what is the objective of funds? In which category this funds fall, how much risk is involved. Factors like cost, investment horizon and financial goal is also considered. Debt funds are evaluated on the factors like fund history, fund returns and ratios like financial ratios and expense ratios. Some best performing debt funds are SBI magnum constant maturity fund, ICICI prudential constant maturity gilt fund, UTI gilt fund, Axis banking and PSU debt fund and Kotak dynamic debt fund.

 

Franklin Templeton’s decision:

Franklin Templeton is one of the biggest mutual fund house and stands in 9th position in the country. They have recently announced that they are winding up the their 6 debt schemes. They are credit risk fund, duration fund, dynamic accrual fund, short term income plan, ultrashort bond fund and income opportunities fund. If valued altogether, this 6 schemes hold around 30,000 core asset of investors. After these scheme got windup, investors who had invested in this scheme cannot withdraw their cash on the basis of the asset they have put and their money is locked.

 

Liquidity concerns:

After Franklin Templeton scraped six debt schemes, liquidity became the main concern for the financial institution. Therefore they have asked investors and HNI’s who have borrowed fund from the banks and other financial institution to bring additional margins in debt mutual fund. This also includes franklin Templeton’s schemes. Investors and promoters have invested money in these schemes to raise money so that they can invest in the market or any other short term scheme to meet their short term capital requirement. Many high network individuals have borrowed money from NBFCs and bank to invest in the mutual funds. They are giving more than 8% returns and are more risky.

 

 

How will businesses survive social distancing?

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Equity Right
Currency, Economy, Market News - April 29, 2020

Effects of Covid-19 on cryptocurrency market

Effects of Covid-19 on cryptocurrency market

Cryptocurrency is a digital currency secured by cryptography which is not issued by banks or governments. In other words, a virtual currency which doesn’t have any physical embodiment is called cryptocurrency. Bitcoins(BTC), Litecoin(LTC), Ripple(XRP) Ethereum(ETH), Bitcoin cash, Ethereum classic, Zcash(ZEC) are some of the types of cryptocurrencies. In the present scenario, the COVID-19 pandemic has affected nearly all areas of businesses, people, economy, trade and the financial system worldwide.

 

Impact of COVID-19:

But at the same time, the COVID-19 pandemic has also helped the world to connect digitally for different reasons like work, purchase of goods, health, etc. One of the most propelling and safe investments was gold but when a liquidity crisis occurs, investments in gold are not up to the mark and fail to generate profits. Here comes the role of cryptocurrencies. The COVID-19 pandemic has caused the physical paper money usage to be minimized to control the spread of corona virus. This is because the virus stays on the objects for a longer time period. Cryptocurrencies acts as a solution to this problem.

 

Benefits of Cryptocurrency:

Cryptocurrency gives the freedom of converting it into money without any manipulation on behalf of the banks and other financial institutions. Cryptocurrencies have made transactions faster by helping the trade system to be efficient. Using the traditional method for transferring funds overseas nearly takes 3 to 5 days. With cryptocurrencies, the transactions can be done in a much shorter time period.

The block-chain technology used in cryptocurrency can serve as a solution in different ways. It can track the supply chain of medical and pharmaceutical products which are considered as essential goods. It can also be used for tracking the amounts received as donations for the cause of corona virus, for tracking the proximity of virus, etc

 

Opportunities brought by Cryptocurrency:

Cryptocurrencies can bring out new growth opportunities for emerging economy like India and also for developed countries. This is because cryptocurrencies provides faster payments between countries with no transfer fees or remittance charges. The stock prices have been hit tremendously and other investment avenues have also seen a downfall due to this outbreak. Investors are looking for much safer investment options in the long run.

Secondly, the growth in the usage of Fintech applications have made many companies to become curious. It could easily adapt to the new working conditions as they are using digital money for payments which has reduced the use of virus infected currencies. It acts as one of the best currencies developed so far and is one of the best alternative for fiat currencies. In future, the value of cryptocurrencies is likely to grow thus helping to be a digitalised paperless economy.

 

 

Production target makes Coal India stakeholders anxious

 

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BKT announced a net profit of Rs. 306 crores in Q1 FY23.
Economy, Equities, Market News, Markets - April 29, 2020

Production target makes Coal India stakeholders anxious

Production target makes Coal India stakeholders anxious

Coal India limited (CIL) contributes more than 80% of coal production in India. It is one of the Public Sector Units in India which is into coal mining and refinery. For the financial year 2020-21, CIL was said to produce 710 million tonnes of coal by the coal minister Pralhad Joshi. The COVID-19 pandemic changed the entire scenario. Joshi added that the coal sector was also adversely affected, leading to ample fuel stock and low demand by the power and energy sector. The situation didn’t influence the government to bring down its target of producing 710 million tonne coal. It will help to achieve the goal of producing 1 billion tonne by the year 2023-24.

As on March 31, CIL had a stock of 74 MT. They are required to achieve the target because the government believes that the demand of the energy sector will rise in a few days. Furthermore, there will be low production in the monsoon season. Hence the maximum production will happen at this time, said an official to the media. The CIL stakeholders said that they already have a pile of stock for 30 days. If it produces 710 MT in the financial year 2020-21, it will lead to more pile up of stock, theft, poor quality and environmental pollution. It will further increase the chances of fire break up in the industry.

 

Production target makes CIL stakeholders anxious

The demand for the coal sector would increase after the lock down phase as mentioned by the Union Coal Minister. The minister of railways Mr. Piyush Goyal overlooks India’s opportunity to be a manufacturing hub. By acknowledging both the statements, the shareholders said these things would occur after a gestation period. Even before the pandemic, the situation was not favorable for the power sector due to low demand.

The coal ministry could have kept realistic targets which may help in keeping the coals at exposed seams. As per the demand, the coal could be extracted from the seams. This would lead to increase in the the cost per ton and decrease in the output per man per shift, said the ministry sources.

The shareholders had a counter statement that the coal productions maximum costs is Rs 1,800 per tonne. The wages and salaries paid to the workers constitutes almost half of the operational cost. An increase in the production target would lead to increase in the compensation paid to the workers of the company. The maximum possible stock which can be produced by CIL is 650 MT if the stock pile up of 125 MT is excluded. Any increase in the production will not be feasible as per the shareholders. Meanwhile, CIL has also taken measures to reduce the operational costs by shifting all of its subsidiary marketing counters from cities to subsidiary headquarters. The CIL officials thought that there are chances for a reduced production target for the financial year 2020-21.

 

 

SEBI and RBI review situation after Franklin fiasco

 

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Equity Right
Business, Economy, Market News - April 29, 2020

Mergers and acquisitions to rise post Covid pandemic

Mergers and acquisitions to rise post Covid pandemic

India’s startup sector may see a huge rise in mergers and acquisitions in the next 3-6 months. This can be anticipated as investors and companies expect a year of decreasing revenue and capital. This is caused by the COVID-19 pandemic as the Indian economy is in lockdown. According to investors, bankers and founders, buyouts will mostly take place in the Indian consumer retail, financial and internet sectors.

A lot of acqui-hires, distress sales and stock-led deals are expected to be completed. Bankers have stated that deals are now being accelerated. This was not possible 3 months ago. Venture capital investors have consolidation high up in their wish-list as they want to reduce portfolios. This wish has resulted due to these investors failing to raise money on their own from Limited Partners.

 

Impact of COVID-19:

The co head of digital and technology at Avendus Capital Mr. Karan Sharma stated that this pandemic is an unknown event. But this event will motivate both the entrepreneurs and Venture Capitalists to be a lot more creative and open. The current events have accelerated some of the conversations of mergers and acquisitions. These talks could have developed 2-3 years in the future. But this pandemic has proven to be a catalyst.

The dealmakers have stated that mergers and acquisitions transactions will rise. Investors have been urging portfolio companies to take measures foe extension of capital for atleast 18 months. Consumer facing businesses and high cash-burn entrepreneurs are urged to look for possible openings to merge.

 

Need for Mergers and Acquisitions:

In the April-June quarter, several companies may have zero revenue due to this pandemic. They will need to cover their costs. Fund raising is also postponed and will take more time to complete. Therefore, it makes more sense to merger. It is better to survive and grow rather than competing for the same capital and consumers. The general agreement is the financial services in the lending space are the primary targets for takeovers. Banks may try to acquire assets from fintech or non-fintech de-funded NBFC’s as they look to increase their tech stack. Currently, these assets are available at a discount.

 

Rise in the startup ecosystem:

Traders expect 55% of the Indian startup sector to have a money runaway for more than 11 months. Consolidation within startups have been on the rise in the past two years. Transactions worth $4.9 billion were recorded in the year 2018 and 2019. A total of 259 offers were noted in this two years. This year 27 offers worth $215 million was recorded.

 

 

Airtel signs deal with Nokia as they prepare for 5G era

 

 

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Equity Right
Banking, Economy, Equities, Market News - April 29, 2020

SEBI and RBI review situation after Franklin fiasco

SEBI, RBI review situation after Franklin fiasco

The RBI and SEBI look to determine the damage from Franklin Templeton’s decision. After their decision to close six debt funds, RBI and SEBI look to contain the fallout from this decision. Franklin Templeton’s decision has raised concerns that investors will withdraw from similar categories across the industry.

RBI’s take on Franklin Templeton’s decision:

The RBI may change rules to encourage banks to borrow more. Through the reverse repo window, RBI may limit the amount it absorbs from banks. The amount may be set at Rs. 2 lakh crore. With banks parking Rs 7 lakh crore from reverse repo, RBI believes there is enough liquidity. To deal with liquidity positions and redemption, RBI officials has communicated with fund managers and banks. One of the proposals was to goad banks to purchase bonds of firms that are investment category. The bonds should not be triple-A rated.

SEBI seeks details from mutual funds:

SEBI also needs information from mutual funds regarding liquidity position and extent of redemption from their debt schemes portfolio. Based on current portfolios, SEBI wants to determine whether mutual funds can handle huge redemption. They also want to know the position of mutual funds regarding debt fund liquidity and days required to liquidate holdings. Debt mutual funds capital is estimated at Rs. 12 lakh crore approximately. According to estimations, Franklin Templeton froze about Rs. 55,000 crore of this credit funds.

Mutual funds approach:

To contain the fallout, mutual funds have also sought help from finance ministry and Niti Aayog for measures. RBI believes there is enough liquidity for fund houses and it is only a matter of channelizing it. However, Fund houses desire to have a separate lending window. The reverse repo rate has already been cut down to 3.75%.

On April 24, mutual funds sold a few top-rated securities assuming the pressure of redemption in the coming days. In the bond market, risk aversion led to yields higher than normal by 20-30 points on April 24.

A few of the large mutual funds persuaded SEBI to boost the borrowing limit. This increase is sought due to the COVID-19 pandemic causing financial markets to freeze as there are sharp outflows. These outflows are from different debt products.

Franklin Templeton stop redemptions:

Following the massive outflows in the last 2 months, Franklin Templeton were compelled to stop redemption. Franklin Templeton has mostly low rated papers in the rest of the portfolio. They only have a select number of buyers in the current market. They have also drained the lending limits in these schemes with banks.

RBI’s inquiry:

RBI inquiry to the mutual find industry is to assess the loan amounts taken from banks. They also need information on the ‘lines of credit’ used by asset management companies and the ‘un drawn lines’. These details are required for March 31 and April 24. To meet the other payout and redemption demands, mutual funds are granted to borrow 20% of their capital from banks. If this limit is exhausted, a raise up to 40% is allowed by SEBI based on merit.

Majority of the mutual funds except Franklin Templeton has not even utilized the 20% limit after RBI pumped money. The money was injected through long-term repo operations (LTRO) in to the system in March.

As of April 23, the borrowings of four mutual funds including Franklin Templeton was Rs. 4,427 crore. On March 31, the assets under debt schemes of the mutual fund industry was Rs. 10.3 lakh crore. This figure is 16% less from the earlier month.

 

 

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