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‘Public sector banks will need an extra Rs 2 lakh crore capital infusion’

Author: Kumar Shankar Roy/Wednesday, July 25, 2018/Categories: Expert View, The Finapolis Conversation

‘Public sector banks will need an extra Rs 2 lakh crore capital infusion’

Investors these days are concerned about state-run banks, rising crude oil price, the ever-weakening rupee and its impact on India Inc's health. All this definitely impacts the government’s finances too. Kumar Shankar Roy caught up with Sankar Chakraborti, who as CEO is spearheading Acuité Ratings & Research's journey. Chakraborti, who is also an independent director on the board of Indian Oil Corp, over the years in his roles at CRISIL and the Centre for Monitoring Economy (CMIE) has had a ring-side of view of how corporates, economies, and governments function. While he believes India is clearly well positioned on growth prospects, adverse global capital movements and volatile commodity prices worry him. Read on to know the expert's views.

All of us have deposits in PSU banks. Is the government putting in enough money in troubled state-owned banks to nurse them back to health?

The government has committed to infuse Rs 1.6 lakh crore in Public Sector Banks (PSBs) over FY17-19 with a significant portion through recapitalization bonds. It has already infused Rs 88,000 crore in FY18 and plans to infuse another Rs 11,330 crore in the current quarter in some of these banks to prevent a breach of the minimum capital requirements. However, this amount will not be adequate given the additional provisions that would need to be made in the next few quarters for the stressed assets that are likely to go to NCLT. Acuité's estimates indicate that PSBs will require an additional Rs 2 lakh crore either from the government or from market sources to offset the impact of continuing losses and ensure a moderate credit growth in FY19 & FY20. Having said this, we have to say that this round of capital infusion establishes the confidence of support that investors expect from the government.

Petrol price hikes pinch common's budget. How is the Indian economy placed in face of rising crude oil price?

Since India is a net commodity importer, we see the rising crude prices as detrimental to both the Current Account Deficit (CAD) as well as the Fiscal Deficit. This will also impact the cost economics of industry (especially manufacturing), agriculture and certain services as fuel is a critical component. We have already seen its impact on the inflation numbers, which we expect to record 5.3% in FY19 (170 basis points higher than the previous year). Export-oriented oil refiners, however, will benefit from these circumstances.

The Indian rupee has hit record lows against the dollar. Is the Indian economy prepared for the current rupee-dollar rates? 

Like all other emerging market currencies, the Indian rupee is also vulnerable. Against the US dollar, it has already depreciated by 6.6% in the first half of the calendar year 2018 and by 8% on a year on year (yoy) basis. The increasingly hawkish tone of the Federal Reserve which has already initiated a reversal of the erstwhile Quantitative Easing (QE) process, is surely a matter of concern. The primary impact of the rupee depreciation will come through commodities particularly oil price hikes. While our imports will become expensive, it may give a boost to import substitution and the "Make in India" initiative. It will provide respite to some indigenous manufacturing segments such as consumer durables and heavy engineering. It can also help the exporters in some segments such as textiles and readymade garments to some extent. 

Some economic indicators show nascent recovery. India is supposedly growing at 7% plus rate but why doesn't it feel like we are in a relatively high growth economy? 

On a macro level, the economy has been performing well post demonetization and implementation of GST. One of the important indicators of the economy is the health of the MSME sector. While demonetization and GST had posed challenges, there are signs of a vibrancy coming back in the sector. Acuité's study on a representative set of 327 MSMEs with rated debt up to Rs 25 crore highlights a significant growth of 27% in revenues and an almost tripling of the net profits in FY18 as compared to FY17. We believe that the economy is gaining strength driven by the increasing formalization of the economy under the GST and the consumption growth prospects. Compared to EM peers, India is clearly well positioned on growth prospects. However, growing efficiencies and higher capital intensity may be leading to lower employment generation. Also, adverse global capital movements and volatile commodity prices would continue to generate headwinds for the economy.

What are your views and further scope of the ratings industry?

The ratings industry is structurally well poised in India given the increasing regulatory push for market funding of large corporates vis-à-vis bank financing. Also, given the asset quality challenges in the banking sector, the usage of external CRAs for bank loans is likely to continue over the medium term. However, increasing expectations from investor community will drive rating agencies to become tech-enabled.

How does corporate health of India look at the moment? What's your long-term outlook?

We looked at the latest quarterly results (Q1 FY19) of 31 listed large companies in India. While this is a short sample and more results are yet to come in, it gives us a flavour of corporate India's performance. The total revenue growth in Q1 FY19 for this sample has increased to 19.2% on a yoy basis as compared to 5.7% in the previous year (same quarter). This clearly indicates better demand buoyancy driven by improving consumption. However, interest expenses have increased by 20.8% on a yoy basis indicating the impact of both an increase in debt levels and higher interest rates. We, therefore, believe that the profitability margins of the large corporate sector may witness some pressure in the current year despite healthy growth in revenues. The long-term outlook on the domestic corporate sector remains positive; however, we believe that the growth prospects will be better for the MSME sector given the increasing formalization of the economy.

Do you see fiscal deficit getting bigger this fiscal and why? 

We are of the opinion that the Fiscal Deficit may slightly contract in FY19 largely because of the positive effect of GST on tax revenue. Our FY19 forecast for Fiscal Deficit is 3.3% (of GDP) as compared to the previous year's 3.4%. However, the crude price movement is important here since a further rising trend against the backdrop of impending elections may induce some fiscal intervention, thereby impacting the deficit figures.  

Bank interest rates have begun to rise. Typically, equity markets perform badly when interest rates rise. Is this theme going to play out over the next 12 months?

The Price to Earnings (P/E) ratio have dramatically come down in emerging markets from the highs of the calendar year 2017, mainly due to the Federal Reserve tapering of QE. All emerging markets have been seeing massive pull out of Foreign Portfolio Investor (FPI) money, adversely impacting both the equity and debt markets. In the period Jan-June 2018, there has been a net outflow of Rs 48,000 crore in both debt and equity from the Indian markets. 

Interest rate hike is a reality and the normalization will impact all the major emerging economies. The RBI has started to respond to such developments through a hike in repo rate by 25 basis points in June 2018 and further hikes can be expected in the current year. Equity markets are expected to remain volatile primarily due to the global developments and partly due to impending elections next year.

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