Recapitalization of Public Banks: A Renaissance or A Bail Out?

Recapitalization of Public Banks: A Renaissance or A Bail Out?

Before starting, it is important to understand what Recapitalization is. It is a simple measure to alter the financial structure of a firm in order to make it better equipped to face the market and to discipline the business model for doing better business. In the case of our Public Sector Banks, it simply means to empower them to face the NPAs better.

Now coming to the topic, recently Ministry of Finance announced an INR 2.11 Lakh Cr Recapitalization into the public sector banks. Of the given sum, 1.35 Lakh Cr to be issue by Government as Recapitalization Bonds and balance 0.76 Lakh Cr to be raised from budgetary allocations and fundraising from the Market.

The measure was hailed by many, including all the leading banking and financial firms, but few also raised doubts. Such investment is pegged to help the Banks fight their current NPAs and clean their balance sheets which is well taken. However, doubts were raised on the account if government will raise such huge sum of money from external agencies as government has no such provision in their budget leading to huge debt. 

The given contrary arguments actually raise the question if the given step is a renaissance of the PSBs or just a bail out from their current bad loan situation with government getting deeper into debt.

Within one day of the announcement being made, the market rallied with all the major public sector bank share seeing huge demand. Almost all the public sector banks saw a surge by minimum 15%. This resulted in the influx of approx. 1 Lakh Cr as against a target of 0.76 Lakh Cr.

As already aware, during the exercise of demonetization around 15 Lakh Cr. cash was deposited with the banks which they were unable to lend at their previous levels as there was a slowdown in the Industrial output due to fall in demand. It is this same money that Government is now taking from the banks by issuing Recapitalization Bonds to that bank, amounting to 1.35 Lakh Cr. 

The capital generated by issuing recapitalization bonds will be infused into the public banks as equity of government. These bonds will have an additional cost implication of approx. INR 8000 Cr per year (assuming Reverse RR). Also the capital generated will appear as a debt in the books as the budgetary provision for the same has been only INR 18,000 Cr (budgeted in previous budget, lying un-utilized) and thus raising concerns over the Fiscal deficit target of 3%.

The union budget for the financial year 2017-18 was presented in 1st Feb 2017 in which the total revenue collection of the government was estimated as INR 19.11 Lakh Cr. The direct tax component was 9.8 Lakh Crore and the indirect tax component was INR 9.31 Lakh Cr. During the budgetary exercise, the impact of Operation Clean Money (result of Demonetization) and Goods & Services tax might not have been considered as trends and data for both the cases were not clear.

If the Direct Tax collection is analysed now with the current numbers and figures of Tax base, it seems that government may end up with the figure of INR 10+ Lakh Crore as against a projection of INR 9.8 Lakh Crore in the union Budget. ( For Details: Demonetization:impact on direct tax )

In the Union Budget, total collection of Indirect Tax was projected to be INR 9.31 Lakh Cr of which Customs comprised INR 2.45 Lakh Cr, Union Excise Duty comprised INR 4.07 Lakh Cr., Service Tax comprised INR 2.75 lakh cr. and UT taxes comprised 4679 Cr. With implementation of GST, the Excise Duty and Service Tax were abolished and the projected figure for Central GST became 6.82 Lakh Cr. However if current collections figures of average 93,000 Cr per month, which is by only 65% of registered firms, is interpolated for the financial year assuming only 85% of them filing GST for the financial year 2017-18, then the given figure stands at approx. 50,000 Cr more than the budgeted figures of 6.82 Lakh Cr.

It can be clearly stated that the principal of INR 1.35 Lakh crore in the books of government can be written of with 2 to 3 Financial Terms, which is the risk government seems to be taking in order to give a push to the banking reforms. But with above said it seems clear that government may not be able to stick to their Fiscal Deficit target of 3%.

With this having been said, it seems pretty clear that the recapitalization may not just be a bail out attempt of the Public Sector Banks by the Government, by taking the risk of debt on themselves, but an attempt to lead them to fight their NPAs by absorbing the losses on account of the NPAs with government having backup resources to write of the debt. However, with such a huge being invested, it's also now the responsibility of the government to come out with stricter norms of lending to avoid any NPAs in future.

Demonetization: Impact on Direct Tax

Demonetization: Impact on Direct Tax

A lot has been said in the media by many economists and bureaucrats in last few months regarding the adverse impact of Demonetization and Goods & Services Tax on the economy. Many have gone on record to say that the Economy has been destroyed. However IMF defers from it in spite of revising the growth from 7.3% to 6.7% and calling it a blip. Even the global financial service, Morgan Stanley, firm has stayed positive on the economy. These contradicting views still keeps the doubt in mind if the exercise was really good?

From the point of view of direct taxation, the story seems a bit different.

If history of direct taxation is analysed it can be seen that something was not right. The average rate of growth in direct tax collection for past seventeen year was 17%. However, if the same is seen for past 8 years, it was only 10.65% or for past 5 years, it was only 8.74% or for the matter of past 3 years, it was further down to 6.89%.  After demonetization, however, it has gone up drastically to 15.3% for one year, considering the provisional figures as presented in the Union budget. This clearly explains that income tax was not being declared by many, in spite of rising working class and wages in last 17 years.

Further, if one analyses the Direct tax as a component of Total Tax revenue collected as on date, it also shows an irregular trend.

It was on constant rise till 2010, but after that it has been falling in an irregular manner. However, after the exercise of demonetization, it seems to have shed the trend of fall and has started to rise which again points back to the corrupt practices which existed earlier.

If the number of individual taxpayers are seen, than one can easily see that the number is on constant rise. For instance, the number of individual tax payers has gone up from 2.22 Cr to 2.79 Cr, a rise of 25%, as on 7th August 2017 as per the official press release of Central Board of Direct Tax.

The total tax Direct Tax collected in the financial year 2016-17 was INR 8.46 Lakh Cr., in which the rise in the last quarter from its previous one stood at 29.6%, which may be attributed to the exercise of demonetization. Even the provisional figures for the current year's budget stands at INR 9.80 Lakh Cr. If the till date collected figures for the Quarter ending in September 2017 are seen, it stands at INR 3.86 Cr, 18% more than the collection for the same quarter in the previous financial year.

If we interpolate the same as per average growth rate from April 2016 to Dec 2016 (as beyond that, demonetization impacted the collections) on accounting rising number of individual taxpayers and IT Department's 'Operation Clean Money' drive the value goes past INR 9.80 Lakh Cr comfortably.

If we assume the collection as projected, i.e. INR 10.48 Lakh Cr, it is around 70,000 Cr. more than the projected figures by government in the union Budget, which means we can actually expect the government to abolish the Income Tax for people earning up to INR 9,00,000 per year (AY 2014-15 data considered as latest authentic data is unavailable) which may come as a big relief to the people and may also help governing political party in future elections. Also this will increase spending and will give industries a much needed push. Although this is just an interpolation of an assumption, but the possibility cannot be ruled out as well as the exact data regarding the number of tax payers were not clear during the preparation of union budget.

On a holistic view, the exercise does seem to have created some short term jolts to the economy but the long term benefits seem to be much favourable, to the government in terms of revenue which can be spent on various social schemes and if the trend continues, to the middle class population as well if government relaxes the limit of the taxable income by certain amount.

The Science of Foreign Debt Loans

The Science of Foreign Debt Loans

In last few years, we are hearing a lot about foreign investments in our Country. From Manufacturing to Infrastructure, from Government to Non-government sectors, all the sectors are at some point taking loans from different foreign entities. As charted below, it can be seen that the debt figures are growing at an average rate of 7.30% year on year.

Any government that comes to power always announces any form of such investment by any external agency proudly, with a lot of pomp and show. With the figure currently standing at around 19% of our Gross Development Product, it becomes important to understand, drill down and see if it will have positive or negative impact on us.

Most of the loans taken by India are either for Government Loans or Non-government Loans. Most of these loans are in form of Commercial Borrowings, Non- Resident Indian Deposits, International Monetary Fund Loans, Bilateral or Multilateral borrowings, etc.

Most of the Non-government borrowings are by private corporate entities who avail it for their business expansion. However, the case with Government borrowing is different, as it is required for various social & economic development projects which have very low revenue generation capabilities. As a result, viability of the borrowings, the repayment of the debt and entity from which the loan is taken becomes a critical issue, which if not taken care may have adverse effects.

Now coming to the Government loans, most of the loans in our country is from World Bank, Asian Development, European Institutes or Japanese Institutes. Globally even China is known to be major investor. A basic in-depth analysis of their economic status, term-loan policies and central bank rates reveals the purpose of giving loans. While World Bank & Asian Development Bank were created to help poor countries reduce poverty, foster economic growth and cooperation, the same doesn't seem to be the case with other Institutions from Japan, Europe or China as they claim. Their purpose of giving loans seems to be something else as seen from the given chart trends.

As it can be seen in European nations, Japan or US, the Long term borrowing rates seen to be reducing. If the same is rate assumed and interpolated for next decade, it can be easily said to go negative. Which means that banks will start charging interest even for the deposits, which is not good for any growing economy. Hence these countries are giving long-term loans at interest rates ranging from 0.1% to 2.5% as it will ensure their money value at least remains static and they continue to grow, even if marginally. So giving such loans are their need as well.

Even the trends of central bank rate strengthen the fact that for most of the European nations and Japan, giving infrastructure loans are their need. This serves the interest of both the entities involved i.e the institution giving the loan and the entity receiving it. However the interest rates of loans extended by China, varying from 2% to 4% (link 1 ,link 2), seems different as it is well below their own Central bank rate. In this case, mutual interest doesn't seem to be the prime motive. This when seen in line with Tajikistan (ceding land china on account of non-repayment), Sri Lanka (Mattala Rajpakasa International Airport being declared world's emptiest airport and unable to generate revenue) and Cambodia (almost 80% of its total debt owed to China) cases rings the bell. It seems more of like a debt trap than a development loan.

The risk any term loan carries is the risk on account of Forex rate. Most of the term loans availed by the borrowers are either in Dollars, Euros or other global currencies and not in their local currencies. Which means due to varying exchange rates, an additional risk on account of Exchange rate becomes a major factor. The extent of impact may even overshadow the lower interest rates by the lender and needs to be checked on timely basis.

Keeping this mind, whenever any government announces any loan with pomp and show, one should study the different aspects and conditions as mentioned and then make any pronouncement regarding the loan/investment availed as growth is good only if sustainable. Not doing so may expose to the risk of falling into the unending debt trap as seen in many cases.

Hyperloop: Welcome to the Travel of Future

Hyperloop: Welcome the Travel of Future 

All the talks about travel of future began when Mr Elon Musk shared a white paper on Hyperloop Alpha (Link) in August 2013. In the white paper, Mr Musk talked about developing a 350 miles (563 Km) long tube from Los Angeles to San Francisco with a special environment inside, in which the Capsules (or Pods, what he calls those vehicles) will travel at an almost sonic speed of one Mach i.e. 760Mph or 1220Kmph. This Hyperloop will reduce the travel time from 6 hours by Motorcars or 1.5 hours by Air planes to mere 30 minutes. Further the cost of travel will reduce from a $100 (INR 6500) by Aeroplane to mere $20 (INR 1300). This proposed concept took the Transportation industry across the globe by storm. Within next one year, many start-up firms emerged (including Hyperloop One, Hyperloop Transportation Technologies, Arrivo, etc.) around the proposed concept, taking up the charge to build the travel of future into reality.

In September 2017, the Andhra Pradesh Government junked the tried and tested Metro project in Vijayawada and signed up an MoU (Memorandum of Understanding) with Hyperloop Transportation Technologies for introducing the futuristic Hyperloop in the capital city Amrawati. The proposed Hyperloop will connect the city of Vijayawada and Amrawati and will cover the distance of 25 Kms between them in just 5 minutes. The feasibility studies are expected to begin from October 2017, however the cost of the project is yet to be disclosed. On 22 September 2017, as per Denver Post, the Transportation department of Colorado also has agreed to develop a Hyperloop connecting Cheyenne, Denver & Pueblo with Vail. The project is expected to cost $24 Billion (INR 1.56 Lakh Cr.) extending for a length of 360 Miles (576 Kms). With the physical, economical and commercial viability of Hyperloop yet to be proven, the question rises that will the Hyperloop be an instant reality or transport of Future.

In his whitepaper, Elon Musk charted out the whole plan at a cost of $6 Billion for Hyperloop capable of moving around 15 Million people per year between Los Angeles & San Francisco at a speed of 760 Mph. This when amortized for 20 years, gives an approximate ticket price of $20 (INR 1300). However, as per the current trends as seen in the recently proposed project in Colorado, the project seems to be costing $24 Billion for almost the same length, which makes the Ticket price at almost 80$ (INR 5200).  This is almost four times what Musk arrived. Also, as per Arabian Business, the Hyperloop from Abu Dhabi to Dubai, having a length of 93 Miles, has a whooping cost of $5 Billion which is similar in lines with the Colorado Project.

Most recently, even Sir Richard Branson announced that a deal has been struck with the Government of Maharashtra for construction of Hyperloop route linking Mumbai to Pune, a distance of 150 Kms (93 Miles) which will reduce the time of travel from 3 Hours to just under 25 minutes. It will have a capacity of 150 Million passenger trips per year and will be completed in a time frame of approx. 6 to 7 years. However no official announcement was made towards the cost of the project but it was stated that it will be well in range of airfare. If a simple interpolation of cost is done in line with the Colorado Project or with Abu Dhabi to Dubai route it can be said that the given project may cost approx. $5 Billion or INR 33 Thousand Cr. However if its capacity is taken as per the white paper, then 150 Million capacity sounds highly exaggerated. Even if the capacity is considered, which was 15 Million for 350 Miles at a speed of 760 Mph in white paper, it will be very less in the case as due to lesser speed and distance, the continuum of pods travelling at a gap of 10 minutes will be lesser as compared to the conditions in white paper, say around 8-10 Million at max. And if this capacity is amortized for 20 years with an 80% capacity, the price per head arrives to be approx. INR 2000-2500 with various cost of O&M or capital not considered. Seeing these trends, it can clearly be said that what Musk proposed may be technologically viable, but financially it is going to be almost double the cost of High Speed Rail considering all the cost of finances.

Many startups have come up and started to test the idea of a low pressure tube with capsules supported on air cushion being accelerated or decelerated by magnetic linear accelerators. Hyperloop One seems to have been in the fore front as on date. They have carried out three test as on date, as listed. The first one on 12th May 2017, the second one on 2nd August 2017, and the third one on 15th Dec 2017, all at Nevada desert.

From the tests conducted by Hyperloop One, it can be seen that they have successfully carried out test running only few meters and have achieved a maximum speed of 240 Mph approx. Even the Pod designed by SpaceX has been tested only up to 220 Mph. But the required speed of the proposed project is 760 Mph and no test has been able to achieve any nearby speed as on date. Further, the low pressure tube has only been tested up to 437 meters. Tube with low pressure running for miles with turns and gradients are yet to be tested and established as safe. Even the case of leak in air pressure in the tube and its effects needs to be tested. Also as claimed, effect of earthquake, temperature, thermal expansion or other adverse situations are yet to be tested and established. And the list of so many ‘things to be done’ goes on.

As much I want it to be a success, but the available trends on project execution and with so many tests/hypothesis yet to be proven, it seems it is too early to say that the Hyperloop mode of transportation is the new thing and ready to be vetted against High Speed Rail mode of transport. However, with the current questions if answered, it can revolutionize the industry. And still, as it seems now, is just a Travel of Future.

(updated 01-03-2018, Mumbai - Pune details added)