Tue, 17th January 2017

Anirudh Sethi Report


Archives of “debt” Tag

Global Debt Hits 325% Of World GDP, Rises To Record $217 Trillion

While we eagerly await the next installment of the McKinsey study on global releveraging, we noticed that in the latest report from the Institute for International Finance released on Wednesday, total debt as of Q3 2016 once again rose sharply, increasing by $11 trillion in the first 9 months of the year, hitting a new all time high of $217 trillion. As a result, late in 2016, global debt levels are now roughly 325% of the world’s gross domestic product.

In terms of composition, emerging market debt rose substantially, as government bond and syndicated loan issuance in 2016 grew to almost three times its 2015 level. And, as has traditionally been the case, China accounted for the lion’s share of the new debt, providing $710 million of the total $855 billion in new issuance during the year, the IIF reported.

Joining other prominent warnings, the IIF warned that higher borrowing costs in the wake of the U.S. presidential election and other stresses, including “an environment of subdued growth and still-weak corporate profitability, a stronger (U.S. dollar), rising sovereign bond yields, higher hedging costs, and deterioration in corporate creditworthiness” presented challenges for borrowers.

Additionally, “a shift toward more protectionist policies could also weigh on global financial flows, adding to these vulnerabilities,” the IIF warned.

“Moreover, given the importance of the City of London in debt issuance and derivatives (particularly for European and EM firms), ongoing uncertainties surrounding the timing and nature of the Brexit process could pose additional risks including a higher cost of borrowing and higher hedging costs.”

For now, however, record debt despite rising interest rates, remain staunchly bullish and the equity market’s only concern is just when will the Dow Jones finally crack 20,000. 

Sadly, since we don’t have access to the underlying data in the IIF report, we leave readers with a snapshot of just the global bond market courtesy of the latest JPM quarterly guide to markets. It provides a concise snapshot of the indebted state of the world.

The World’s Largest Trading Floor Is For Sale

Back in September, before the much hoped for Trump “renaissance” of Wall Street, we presented two pictures that summarized the recent transformation of the US financial sector from a trader- to an algo-centric one.

We showed the trading floor in UBS’ Stamford office, once the largest in the world and big enough to hold 23 basketball courts, and which was a symbol of everything that went right on Wall Street. Packed with traders, it was a non-stop cacophony of screaming, constant motion and furious energy – to an outsider sheer chaos, which somehow ended up generating millions in profits for the bank every day. Some time around 2008, just before the financial crisis hit, it looked like this.

 Fast forward 8 years later, when all that’s left of the UBS trading floor, and the legacy of that version of Wall Street, is this:

ICRA pegs revenue loss from toll collections suspension in first 10 day at Rs 460 cr; road project debt servicing under lens

The debt servicing ability of road projects would be under strict watch over the next few months, as the impact of demonetisation on the cash flows becomes clear, say credit rating agencies.

Although the National Highways Authority of India (NHAI) has authorised its regional officers to make payment covering 90% of the interest amount provided in the financial/refinancing package to the concessionaires on submission of the required documents, this would remain inadequate, say analysts.

Shubham Jain, vice president, ICRA said, “Unlike annuity road projects, wherein the principal repayment falls due on semi-annual basis, majority of the toll road projects have monthly debt-repayment frequencies. With only interest cost and operations and maintenance expenses getting compensated, the compensation will be inadequate from the debt servicing point of view, unless the project has DSRA or other cash reserves to fall back on”. However, Jain said that the projects with DSRA constitute a very small percentage of the operational projects and hence the credit impact on the sector can be substantial.

BIS Warns OF Bouts Of Extreme Volatility, As Market Undergoes “Paradigm Shift”

The Bank of International Settlements is particularly good at two things in its periodic quarterly review update: i) stating the obvious, especially when it comes to summarizing the trader and market participants concerns at any given moment, and ii) having its constituent central bank members – after all the BIS is the “central banks’ central bank” – ignore all of its warnings.

In its just released, latest report, the BIS continues to excel in both, when it lays out what it dubs a “paradigm shift in markets” and points out that unlike previous VaR shock episodes, most notably the 2013 Taper Tantrum, financial markets have been remarkably resilient to rising bond yields and sudden shift in outlook following last month’s shock U.S. election result.

India : PSU banks write off Rs 1.54 lakh crore bad loans

Public sector banks (PSBs) have written off Rs 1.54 lakh crore of bad loans between April 2013 and June 2016, Parliament was informed today. During 2013-14, all PSBs written off Rs 34,409 crore non-performing assets (NPAs). The amount increased further to Rs 49,018 crore in the following year. Banks wrote off NPAs of Rs 56,012 crore during 2015-16, Minister of State for Finance Santosh Kumar Gangwar said in a written reply to the Rajya Sabha.

He further said that Rs 15,163 crore write-off of NPA has taken place during the first quarter of the current fiscal.

Replying to another question, Gangwar said, there were 661 NPA accounts above Rs 100 crore amounting to Rs 3.78 lakh crore from public sector banks as on March 31, 2016.

As on September 30, gross NPAs of public sector banks rose to Rs 6,30,323 crore as against Rs 5,50,346 crore by June end. This works out to an increase of Rs 79,977 crore on quarter on quarter basis.

Short-term debt relief approved by Eurogroup but tough measures loom

Eurozone finance ministers struck a deal in Brussels on Monday on short-term measures to lighten Greece’s debt burden, but the conclusion of the country’s second review of its third bailout and the participation of the International Monetary Fund have been deferred to January.

“The Eurogroup endorsed today the full set of short-term measures, including extending the repayment period and an adjustment to interest rates,” the Eurogroup said a statement.

The decision was seen to reward Greece for implementing the latest batch of reforms demanded as part of its bailout program.

The head of the European Stability Mechanism, Klaus Regling, said after the meeting that the short-term measures will start being implemented “in the next weeks.”

The measures, however, did not meet the demands of the IMF, which has demanded substantial debt relief and harsher austerity procedures in order to join the Greek program.

Rs 4 trillion of loans face default risk: India Ratings

Eighty-five companies that have collectively borrowed Rs4 trillion will find it tough to repay their loans, despite debt restructuring tools such as the scheme for sustainable structuring of stressed assets (S4A), India Ratings and Research Pvt. Ltd (Ind-Ra) said.

The primary reason for the precarious situation is a build-up of non-productive assets on the books of these companies, the ratings company said on Tuesday.

In a report documenting asset funding trends in 500 most indebted firms, analysts at India Ratings said increasing financial assets and decreasing fixed assets on the books of these firms indicate a turnaround might be difficult.

India Ratings said these 85 companies, which it termed vulnerable, are primarily in aviation, infrastructure and construction, consumer durables, sugar, engineering and equipment, and trading.

The 85 vulnerable borrowers saw fixed assets fall to half their total investments in June 2016, compared with 72% as on March 2011, India Ratings noted. In the same period, their financial assets rose from 26% to 45%. Read More 

Fitch says Chinese banks may need $246bn to cushion off-balance sheet risks

Chinese banks reported declining a nonperforming loan ratio over the first three quarters of 2016. But beneath the veneer of stabilizing asset quality looms a far greater hazard brought by fast-growing off-balance sheet lending and investment activities through channels such as so-called wealth management products (WMPs), according to ratings agency Fitch Ratings.

As a buffer against this risk, the agency estimates that mainland banks may need about 1.7 trillion yuan ($246 billion) in additional capital.

 “In the past few years, we’ve seen WMPs carried off balance sheets continue to increase,” Jack Yuan, associate director at Fitch, said in a conference call on Thursday. He found that more than three-quarters of outstanding wealth management products, totaling 20 trillion yuan, resided outside banks’ loan books as of June.
 Wealth management products were particularly prominent at midtier banks such as China Merchant Bank, China Everbright Bank, and Ping An Bank. Their wealth management products represented over 30% of their total assets, and more than half of their deposits.  

State-owned commercial banks, with the exception of the Bank of Communications, are relatively less exposed. However, their issuance is considerable in absolute terms. Industrial and Commercial Bank of China(ICBC) is the single-largest issuer of wealth management products, with around 2.6 trillion yuan in outstanding issuance, according to Fitch.

Fitch: India Demonetisation Fallout Offset by Uncertain Benefits -Full Text

The demonetisation of large-denomination bank notes has caused short-term disruption in India’s economy. The move has the potential to raise government revenue and encourage bank lending, but Fitch Ratings believes the positive effects are unlikely to be strong and sufficiently enduring to support credit profiles.

The withdrawal of bank notes – that account for 86% of the value of currency in circulation – has created a cash crunch, and seems to be holding back economic activity. Consumers have not had the cash needed to complete purchases, and there have been reports of supply chains being disrupted and farmers unable to buy seeds and fertiliser for the sowing season. Time spent queueing in banks is also likely to have affected general productivity. The impact on GDP growth will increase the longer the disruption continues, but we will already need to revise down our forecasts to reflect what will almost certainly be a weak 4Q16.

The ultimate aim of the note withdrawal was to curb the use of black money, which is in line with the government’s broader reform agenda. The informal sector is very large in India, accounting for over 20% of GDP and 80% of employment.

The move could boost government revenue to the extent that demonetisation helps to move economic activity from the informal to the formal sector, as more earnings would be declared. It is possible that this positive effect would soon outweigh the drag on revenue collection from lower short-term GDP growth. Government finances may also benefit from a proportion of high-denomination notes not being traded. This potentially significant amount would be subtracted from the Reserve Bank of India’s (RBI) liabilities, and the authorities would have the option to transfer this windfall to the government.

India : Over 8,100 wilful defaulters owe Rs76,685 crore to banks, Lok Sabha told

Public sector banks (PSBs) have reported 16% rise in number of wilful defaulters at 8,167 who collectively owe them Rs76,685 crore at the end of March 2016.

As against the previous year, there is 16% rise in wilful defaulters owing over Rs25 lakh each to 8,167 from 7,031 at the end of March 2015. However, dues to the bank have increased to 28.5% to Rs76,685 crore in 2015-16 from the earlier Rs59,656 crore.

To recover loans from such defaulters, banks have filed 1,724 FIRs with a total outstanding of Rs21,509 crore in 2015-16. The conviction rate in all these cases was only 1.14%.

Last fiscal, banks recovery efforts in such cases yielded Rs3,498 crore. There were 129 wilful defaulters who borrowed loans in excess of Rs100 crore amounting to Rs28,525 crore from PSBs as on 30 June 2016, minister of state for finance Santosh Kumar Gangwar told the Lok Sabha in a written reply.

To bring down NPAs, he said, RBI has formulated guidelines for early recognition of financial distress for recovery from borrowers. “Before a loan account turns NPA, banks are required to identify stress in the account under three sub-categories of Special Mention Account (SMA),” he said.