Banking: An added burden for banks

The stimulus package, which was expected to offer huge respite to businesses and individuals reeling under the pandemic crisis, has instead left the banking sector with a huge burden.

No concrete measures

The biggest disappointment comes from the fact that the hyped-up ₹20-lakh-crore package does not offer any concrete measures for boosting demand in the economy.

After all, lending activity and asset quality of banks are closely linked to the state of the economy.

Hence, with the GDP set to shrink notably this fiscal and insolvencies among corporates and individuals set to rise, banks will be hit by both weak credit off-take and sharp rise in bad loans. The RBI’s six-month moratorium (extended until August 31) could also throw up some nasty surprises for banks, as 30-40 per cent of loans (at an aggregate level) are under moratorium.

IBC backfires

The blanket ban on fresh insolvency cases under IBC (Insolvency and Bankruptcy Code) for one year, announced by the Centre in a bid to offer respite to corporates, is also a big setback for banks.

Banks’ inability to proceed against borrowers not only impedes recovery, but can also impacts the credit behaviour of borrowers and leads to fraudulent promoters gaming the system.

As such, recovery rates for banks under IBC has been poor at 30-35 per cent, and fraught with undue delays. A one-year suspension can further clog the IBC machinery and erode value for banks.

Unless the RBI offers a one-time restructuring window, banks are in for some turbulent times ahead.

The measures announced in the package to ease funding issues for MSMEs (micro, small and medium enterprises) and NBFCs (non-banking financial companies) rely largely on the banking sector to do the needful.

The ₹3-lakh-crore collateral-free loans for MSMEs with 100 per cent credit guarantee by the government, is aimed at addressing the risk-aversion among banks.

While the guarantee (government as guarantor in case of default) and zero risk-weight (lower capital requirement) can nudge banks to lend to MSMEs, without having to bear the burden of large defaults, the scheme covers only good borrowers (less than 30 days past due).

MSME borrowers who are already under stress or classified as NPAs can remain a risk for banks (subordinate debt provision and fund of funds measures are not easy to implement). Even under the credit guarantee scheme, past experiences with claim approvals and recovery of dues suggest that processes and implementation will be critical.

For NBFCs, the ₹30,000-crore special liquidity, covering investment-grade debt papers of NBFCs/MFIs (micro finance institutions) with full government guarantee, is a positive. But again, only larg and well-rated NBFCs may benefit from the move, as the kitty is small and fund seekers are large in number.

For stressed NBFCs or those with AA and below ratings, the government’s partial guarantee scheme of ₹45,000 crore (covering only the first 20 per cent loss) may not yield significant relief as banks would continue to remain cautious.

NBFCs continue to face challenges in collections and recovery; the moratorium offered to their borrowers (but not to them by banks) has only accentuated the pain.

In the past one year, credit growth for the entire banking sector has plummeted to 6-7 per cent (from 13 per cent last year).

For listed players, bad loans have gone up by nearly ₹40,000 crore between March and December 2019.

While the increase has been mainly led by YES Bank, bad loans generally have remained elevated for most banks, owing to substantial slippages and weak recovery.

Earnings have been weak and this has already added pressure on capital.

Over the next one year, banks’ risk capital will remain scarce. Hence, investors should stick with banks with strong balance sheets and capital base to absorb future losses. HDFC Bank, ICICI Bank, Axis Bank and IndusInd Bank have strong capital ratios. However, any risk to growth or a spike in slippages could keep these stocks under pressure in the near term.

Power: Funds come with strings attached

The Centre has unveiled a few measures for the power sector as a part of the stimulus package. The proposal with the most immediate impact is a ₹90,000-crore liquidity package for distribution companies (discoms).

Privatisation of discoms in union territories and tariff policy reforms were other announcements.

The tariff policy reforms is, however, contingent on the passing of the draft Electricity Bill 2020.

Discoms’ dues

Despite many revival packages in the past, including the partially successful UDAY scheme (Ujwal DISCOM Assurance Yojana), the power distribution sector is in the doldrums.

The latest liquidity of ₹90,000 crore to discoms will be routed through the Power Finance Corporation and REC.

These two institutions will loan funds to discoms to help the latter clear their overdue payments.

The amount of the loan to discoms will be equal to the outstanding dues to power generators and transmission companies, including any subsidy obligations of State governments.

The payment will be directly released to power producers and transmission companies, based on authorisation from the discoms.

The loans are, however, contingent upon discoms clearing their dues, implementing reform measures such as installation of smart meters, and improving operational and financial efficiency.

Among the listed power generators, NTPC has the largest amount of overdue payments from discoms of around ₹13,600 crore as of March 2020, according to data from Praapti (Payment Ratification And Analysis in Power procurement for bringing Transparency in Invoicing of generator) portal.

Then comes Adani Power with overdues of nearly ₹12,810 crore, NLC India with nearly ₹6,000 crore, and NHPC with nearly ₹2,500 crore.

The discoms clearing their unpaid dues will help reduce the interest costs of power producers by reducing their working capital cycles. It will also help them repay their loans to their lenders.

One thing that might be of concern to investors in publicly listed power generators is the condition that Central public sector enterprises (CPSEs) such as NTPC and NHPC have to give a rebate to discoms when they repay their dues.

This is further conditional on discoms passing on the rebate on reduced fixed charges, from power producers, to the end consumers.

The rebate on fixed charges to discoms will be a dampener for CPSE power producers.

Privatisation of discoms

The Centre had announced that it will privatise discoms in union territories as part of its measures to boost the power sector. This proposal is one among the many included in the draft Electricity Bill 2020.

Listed companies such as Tata Power and Adani Transmission would be interested in bidding for discoms in union territories when they are privatised.

Tariff policy

Most of the measures in the tariff policy reforms are part of the draft Electricity Bill 2020, which is currently open for inputs from stakeholders.

So, measures such as standard of service and associated penalties for discoms, penalties on discoms for load-shedding, reduction of cross subsidies, no regulatory assets (gap between expenses and revenue recovered from consumers), direct benefit transfer for electricity subsidy, timely payment to power producers, among others, have no legislative backing as of now.

If the draft electricity bill is passed, the listed power generators will get their payments on time without inordinate delays.

Discoms usually wait for State governments to pay them the subsidy amount, which in turn holds up payments to power generators.

The direct subsidy transfer scheme for power consumers and reduction of cross subsidy could lead to power generators’ working capital cycles becoming shorter.

And this, in turn, could lead to lower interest costs.

Mining: A foot in the door for private players

Measures announced for the mining sector as part of the Atmanirbhar Bharat package will have far-reaching impact on mining and metal companies.

One such announcement is allowing private players’ participation in the coal sector. This had been proposed in January through the Mineral Laws (Amendment) Ordinance, 2020. Earlier, only captive users — who use coal as input and not for sale — could bid. The new rule with no end-use restrictions is expected to result in wider participation in the auction of coal mines and remove the monopoly of Coal India.

The Centre had announced that the auction of coal mines will be based on a revenue-sharing basis (a percentage of revenue share (final bid) has to be paid to the government on the sale of coal) as against the current mechanism of paying fixed rupee per tonne. This might also encourage private players to participate in the coal auctions as the proposed model helps maintain the margins when prices fall.

Further measures to encourage participation include a rebate on revenue share to be paid to the government, in case of early production or coal gasification/liquefication.

While these measures would surely bring in new private players into coal mining, it may take some time before private players pose a serious threat to the PSU behemoth.

Coal India accounts for over 80 per cent of domestic coal output.

The company has seen a modest production (volumes) growth rate of 2.8 per cent CAGR (compounded annual growth rate) over the three years ended FY20 (602 million tonnes in FY20). The firm targets to reach 1 billion tonnes of production by FY24.

Entry of private players will not only improve coal output, but may also prod Coal India to improve its operations efficiency (the capacity utilisation of Coal India in FY19 was 78 per cent). But with the requirement of mining companies to obtain forest/environment clearance and other regulations, coal production from new entrants is expected to take at least 4-5 years.

Also, private players may not be too interested in the sector amidst bleak demand outlook for metals and low prices for commodities. Further, limited rake availability from the Railways for private players to transport the mineral could also be a deterrent.

Coal India could thus continue to enjoy its monopoly for a few more years. However, the Centre’ announcement that Coal India would provide concessions to power companies to an extent of ₹5,000 crore would be negative to the company in the short run.

Good for metal companies

With relaxed eligibility conditions and upfront payment for commercial coal auctions, steel and metal companies will benefit in the long run.

In India, due to the non-availability of coking coal — a key raw material in making of steel — steel companies such as Tata Steel and JSW Steel depend on imports.

These companies can, going ahead, substitute imports with domestic coking coal.

The announced measures also include extending the tenure of coking coal linkage to 30 years from the current 15 years.

Besides, the government’s decision to introduce joint auction of bauxite and coal mineral blocks will benefit the aluminium industry.

Companies such as Hindalco and Vedanta can save on import bills as a significant portion of the bauxite requirement is currently met through imports. Allocation of coal blocks along with bauxite blocks will also enable aluminium companies to reduce their power costs, which is the major component of cost of production.

In addition, the measure to rationalise the stamp duty in the mining sector will be a positive for both mining and metal companies.

Infrastructure: Near-term issues unaddressed

With most of their near-term troubles ignored, the economic package has nothing phenomenal for companies in the infrastructure space.

Despite partial lifting of restrictions, companies continue to face the near-term perils of reverse migration of labourers and stretched working capital finances.

Both these issues went unaddressed in the package.

While MSMEs were assured of speedy payments from the Centre in the next 45 days, the same was missing for construction contractors (most do not qualify as an MSME).

With long-pending dues from the Centre and States, companies such as NCC, Dilip Buildcon and other road contractors have already reported a spike in receivable days in the first nine months of FY20.

The only relief announced for contractors was a deadline extension of six months by Central agencies and departments for their contractual obligations.

This is, however, already embedded in most of the concession agreements — the force majeure .

However, the announcements continually reinforced that the Centre is keen on infrastructural development — as earlier outlined in the National Infrastructure Pipeline.

Additional funds for agricultural infrastructure and an enhanced viability gap funding (up to 30 per cent) for the social infrastructure space were a few measures in this direction.

Companies such as Larsen & Toubro which have much diversified order books, could likely benefit from these measures in the long term.

Real estate: Little benefit

The Centre has doled out little to both home buyers and companies in the real estate space. The measures announced include a temporary relief to developers, in case of any Covid-19-induced project delays. This liberates developers from regulatory penalties for up to six months for RERA-registered projects due for completion on or after March 25, 2020.

While this may benefit the developers, home buyers are left in the lurch, with possible delay in deliveries.

Though an extension was announced for getting loan under the middle-income group (MIG) Credit-Linked Subsidy Scheme (CLSS) till March 2021, housing demand is expected to remain muted.

Given the income reduction and, in some cases, job losses, it is unlikely that the extension of the credit subsidy will draw home buyers to property loans.

Consumers are likely to defer property purchases, which can further raise the number of unsold residential units in the market. The real-estate sector, particularly the residential space, is already reeling under pressure due to subdued demand and high unsold inventories, even in the affordable housing segment.

Following the Centre’s push on affordable housing, large players, including Sunteck Realty, Godrej Properties and Prestige Estates Projects, too, ventured into the segment.

According to a report by ANAROCK, a property consultant, there are about 6.44 lakh unsold units in the market in the top seven cities; of these, 39 per cent are valued less than ₹40 lakh.

Since the economic package failed to address the demand-side issues, not only will the unsold inventories see a rise, but the property prices could also see a likely correction.

With uncertainties looming large, the realty index has declined nearly 40 per cent in just the past six months.