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Richest Asian banker Kotak faces push to pick outsider as successor: Sources

Richest Asian banker Kotak faces push to pick outsider as successor: Sources



India’s banking regulator is nudging Kotak Mahindra Bank to select someone outside the lender’s ranks to succeed billionaire founder Uday Kotak as the next Chief Executive Officer, according to people familiar with the matter.

The Reserve Bank of India has conveyed its view to board members of Kotak Mahindra Bank and Asia’s richest financier, they said, asking not to be named, as the communication is private. The regulator is also reviewing whether stakes the banking group holds in two wholly-owned insurance units pose any risks to the firm’s stability, the people said.
India has tightened rules limiting bank CEOs’ tenure to a maximum of 15 years and has been reviewing the stakes that banks hold in insurers in order to strengthen the nation’s financial system. RBI had said in 2021 that the outgoing head should take a three-year cooling period and shall not be “appointed or associated with the bank or its group entities in any capacity, either directly or indirectly,” to ensure there is a clean break for the outgoing head from the bank.

Kotak’s tenure as CEO of India’s fourth-largest private lender ends this year. He has received shareholder approval to subsequently remain on the board. Choosing one of his lieutenants from within the bank’s ranks, while he is on the board, will defy the spirit of the regulations, leaving Kotak in a position to potentially influence decisions, according to the people.
There has been no “communication, formal or informal, from RBI to the bank or its board members on CEO succession,” a spokesperson for Kotak Mahindra Bank said in an email after the story was published. The bank had previously declined to comment on the CEO succession.
“Current holdings of Kotak in its insurance companies are as per the extant regulatory prescriptions and processes,” according to the spokesperson. An RBI spokesperson didn’t respond to emails seeking comments.
Shares of the Mumbai-based bank fell 1.2%, while the benchmark S&P BSE Sensex Index rose 0.3% as of 12 p.m. in Mumbai trading. Year-to-date the stock has risen 1.5%, compared with a 9% jump in the 30-stock index.
An outsider coming in as CEO might be “a slight negative and adds uncertainty around management changes,” Jefferies Financial Group Inc. analysts Vinayak Agarwal and Prakhar Sharma said in a note to clients on Monday. By the end of August, “the bank is expected to suggest at least three names in the order of preference, of which the RBI will approve one for appointment,” according to the note.
The financier had engaged consulting firm Egon Zehnder to lead a global search for a CEO and its top executives Shanti Ekambaram and KVS. Manian were the internal candidates for the job, Bloomberg News reported earlier this year. The RBI has a final say on appointing heads of the nation’s lenders though the bank’s boards decide on the shortlist of candidates.
Insurance Units
Kotak Mahindra’s holdings in units — Kotak Mahindra Life Insurance Co. and Kotak Mahindra General Insurance Co. — are also under review as the central bank assesses the banks’ stakes in insurance companies, the people said. It is the only major bank in the country with fully-owned insurance subsidiaries.
While Kotak Mahindra had been working with advisers, including Morgan Stanley, to pare its stakes in the insurers for several months, no transactions have been finalized as of now, people familiar with the information said. A spokesperson for Morgan Stanley declined to comment.
In the past, Kotak had challenged the RBI in court to retain his stake in the lender at a level above the regulator’s threshold. The bank had then argued that the central bank wasn’t empowered to dictate founders’ shareholdings as RBI sought to separate management and ownership functions at lenders to improve corporate governance.
Kotak has a net worth of about $14.5 billion, most of which comes from his 26% stake in the bank, according to the Bloomberg Billionaires Index. He has led the bank since it was converted into a lender in 2003 from a non-banking finance company.

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Why HDFC twins are merging — and how consumers and the financial sector will be impacted


Mortgage major HDFC Ltd and India’s largest private bank HDFC Bank are set to merge on July 1 to create a combined entity with a market capitalisation of Rs 14.37 lakh crore. The merger will benefit both shareholders and customers at a time of steady growth for the Indian economy.

HDFC Chairman Deepak Parekh and HDFC Vice Chairman Keki Mistry said on June 27 that the two companies will have separate board meetings after office hours on June 30, which would be the last board meeting of HDFC Ltd. After the merger, HDFC branches will continue, but the signboards will say HDFC Bank.

“Every employee under the age of 60 will be absorbed and salaries will not be reduced. HDFC Bank will need our people because they don’t have knowledge of mortgages,” Parekh said. There will be no golden handshake for employees of HDFC Ltd.

HDFC has said that the tentative ‘record date’ for determining shareholders of HDFC Ltd who would be allotted equity shares of HDFC Bank as per the share exchange ratio, is July 13, 2023.

“Both HDFC Ltd and HDFC Bank are working towards completing all the necessary formalities for completion of the proposed amalgamation as per the tentative dates,” HDFC said.

Mistry said the two organisations have different products. “The bank has everything other than housing and HDFC Ltd does only housing. The commonality of roles is limited. It is limited to certain corporate functions,” Mistry said.

The merger has received approvals from the Reserve Bank of India (RBI), insurance regulator Insurance Regulatory and Development Authority of India (IRDAI), the National Company Law Tribunal (NCLT) and the antitrust watchdog Competition Commission of India.

IRDAI has also approved the acquisition of shares of HDFC Life Insurance Company and HDFC ERGO General Insurance Company by HDFC Ltd, and the transfer of the entire shareholding of HDFC Ltd in HDFC Life and HDFC ERGO to HDFC Bank.

HDFC Ltd was set up by H T Parekh, the uncle of Deepak Parekh, in 1977. HDFC Bank was started in January 1995, after the RBI opened up the banking sector to private players. HDFC Bank has more than 6,300 branches globally and 18,000 ATMs. HDFC Ltd has 464 offices across India.

So why did the “HDFC twins” decide to merge?

Three key factors made it an opportune time to go ahead with the merger in April 2022. The prevailing low interest rate environment was supportive; RBI had lowered the CRR and SLR requirement from 27 per cent to 22 per cent; and there was high liquidity in the system.

According to a source, there was an additional factor as well: the leadership at HDFC Ltd was closing 70, and in view of the looming question of succession, it was felt that a merger with HDFC Bank will bring the best synergy benefits.

Banking sources said the proposal was put up even when Aditya Puri was MD of HDFC Bank, but could not go ahead due to several concerns. Puri stepped down from the position he had held for 26 years on October 26, 2020.

Although there had been speculation for long, the news of the merger was successfully kept under wraps until the actual announcement.

Does the merger make sense?

With the RBI tightening the regulatory environment for non-banking financial companies (NBFCs), especially with regard to NPA (non-performing assets) recognition norms, and making the regulations almost similar to banks, the incentive for keeping HDFC Ltd and HDFC Bank separate had been diminishing.

Also, banks, led by SBI, and new-age fintech companies have intensified the competition in the home loan segment.

However, business-related synergies could have been driven even without the merger. The bet by the management is that the increased size of the balance sheet of the entity will enable it to increase its competitiveness and create shareholder value. HDFC Ltd posted a net profit of Rs 16,239 crore in FY2023; HDFC Bank’s profit was at Rs 44,108 crore.

Will HDFC Bank benefit from the merger?

The merger will be more beneficial to HDFC Ltd since its business is less profitable — it can increase its product penetration, and funding costs are expected to come down.

However, HDFC Bank will get an unparalleled advantage through the mortgage portfolio, providing it a quantum leap in distribution to semi-urban and rural areas with a huge opportunity to cross-sell bank products to a very sticky client base.

“The combined entity will be able to extract substantial synergy benefits which abide well for all stakeholders and shareholders,” said an analyst.

While the merged entity will see some cost synergies, it is difficult to see how the merger will by itself help the merged entity increase its market share. HDFC Bank has been beset by the woes of its digital initiatives, and many parts of its retail banking are under pressure from fintech companies.

HDFC is facing increasing pressure from public sector banks in its mortgage business. However, the management does have the wherewithal to meet the short-term challenges and come out on top, an analyst said.

Another advantage of the merger is that the cost of borrowing will come down for HDFC. When this happens, the combined entity gains in terms of cost efficiencies, and is value accretive for shareholders.

And what will the merger mean for shareholders?

As part of the merger, 42 shares of HDFC Bank will be given for every 25 shares of HDFC Ltd. Post the amalgamation, HDFC Bank will be 100 per cent owned by public shareholders, and existing shareholders of HDFC Ltd will own 41 per cent stake in the bank. The foreign stake is around 8 per cent in the bank, and is likely to increase.

On June 27, the shares of HDFC rose 1.59 per cent to Rs 2,762.50; HDFC Bank gained 1.38 per cent to reach Rs 1,658.00 on the BSE.

What will be the impact on the financial sector?

Competition is expected to heat up, especially between HDFC Bank and SBI, which is India’s largest bank. The home loan segment has become attractive as non-performing assets are minimal.

According to ICICI Securities, HDFC Bank aims to double its balance sheet in five years, exhibiting 15% annual growth. Expanding its physical presence (it plans to double the number of branches in the next three years); focussing on digital capabilities (it plans to change tech stack in three to four years); enhancing the product ecosystem for better customer experience; and a push in newer segments (MSMEs) and geographies (rural and semi-urban areas) could enable the bank to achieve its targeted growth and profitability, it said.

The banking sector is expected to witness further consolidation in the coming months. Axis Bank recently acquired Citibank’s retail businesses in India for Rs 12,325 crore, and the government has put IDBI Bank on the block for privatisation.

According to a Standard & Poor’s ranking, State Bank of India retained its top position after its assets increased 2.64 per cent year-on-year to $725.08 billion. Owing to its proposed merger with HDFC Ltd, the pro forma assets of HDFC Bank rose 57.67 per cent to $441.05 billion, which enabled it to hold on to the second rank. ICICI Bank secured the third spot, with total assets of $238.49 billion.

What can be some of the challenges going forward?

While market participants feel the deal was inevitable given the current environment and shrinking of regulatory arbitrage for NBFCs, the biggest challenge was to meet the regulatory requirements.

A banker said that HDFC Ltd is into developer financing, but HDFC Bank doesn’t do it as of now. While doing it may increase risks, not doing it will weaken the mortgage finance business. Developer finance is key to sourcing mortgage customers from the project.





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Banks may have to settle with some of the 16,044 wilful default accounts with Rs 346,479 crore debt till end-2022


Banks reported as many as 16,044 borrowers with a cumulative debt of Rs 346,479 crore in the wilful default category — borrowers who refuse to repay loans despite having the capacity to make payments — as of December 2022. Some of these borrowers will be able to approach lenders for a compromise settlement following the Reserve Bank of India (RBI) decision to change the rules for eligibility that virtually reverses its earlier policy of keeping wilful defaulters out of its compromise settlement scheme.

The amount stuck in the wilful default category has jumped by 41 per cent, or over Rs one lakh crore in the last two years from Rs 245,767 crore in December 2020, according to data compiled by Transunion Cibil, a credit information company registered with the RBI. While most of the 16,000 plus wilful defaulters may not be eligible for the compromise settlement, some of them are likely to approach the lenders for the ‘settlement’.

Banks can undertake compromise settlements or technical write-offs in respect of accounts categorised as wilful defaulters or fraud without prejudice to the criminal proceeding underway against such debtors, the RBI said in a circular on June 8, 2023. Compromise settlement refers to a negotiated settlement where a borrower offers to pay and the bank agrees to accept in full and final settlement of its dues an amount less than the total amount due to them under the loan contract. This settlement invariably involves a certain sacrifice by way of write off and/or waiver of a portion of the lender’s dues on a one-time basis. Banks had approved several compromise settlements running into hundreds of crores with huge haircuts – or the reduction of outstanding payment or loans that will not be repaid by the borrowers – between 2000 and 2014, leading to huge losses for banks in the last two decades.

The central bank has also directed banks to fix a minimum cooling period of at least 12 months before making fresh exposures to borrowers who had undergone compromise settlements. This means a wilful defaulter or a company involved in fraud can get fresh loans after 12 months of executing compromise settlement.

As per the Reserve Bank of India’s (RBI) classification, a ‘wilful default’ would be deemed to have occurred if the borrower has defaulted in meeting their repayment obligations to the lender even when they have the capacity to honour the obligations. A wilful default happens when the borrower has not utilised the finance from the lender for the specific purpose for which finance was availed, and has diverted the funds for other purposes, or siphoned off funds, or disposed of or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank.

The central bank has virtually reversed its earlier policy of keeping wilful defaulters out of compromise settlement. On June 7, 2019, the RBI, in its ‘Prudential Framework for Resolution of Stressed Assets’, made clear that the borrowers who committed frauds/ malfeasance/ wilful default would remain ineligible for restructuring. Now this sudden change in the framework by the central bank to grant compromise settlements to wilful defaulters came as a shocker to the banking sector as it will not only lead to erosion of public trust in the banking sector but also undermines the confidence of depositors.

The RBI’s latest ‘Framework for compromise settlements and technical write-offs’ is considered as a “detrimental step that may compromise the integrity of the banking system and undermine the efforts to combat wilful defaulters effectively”. It not only rewards unscrupulous borrowers but also sends a distressing message to honest borrowers who strive to meet their financial obligations. “We firmly believe that allowing compromise settlement for accounts classified as fraud or wilful defaulters is an affront to the principles of justice and accountability,” said All India Bank Officers’ Confederation (AIBOC) and All India Bank Employees Association (AIBEA), representing 6 lakh bank employees.

There were 14,202 wilful default accounts involving Rs 285,474 crore as of December 2021 and 12,907 accounts for Rs 245,767 crore in December 2020, according to Transunion Cibil data.

State Bank of India (SBI) leads with 1,881 wilful default accounts for Rs 79,227 crore as of December 2022, followed by PNB at Rs 38,333 crore (2,143 accounts), Union Bank of India Rs 35,561 crore (1,747 accounts), IDBI Bank Rs 23,601 crore (335 accounts) and Bank of Baroda Rs 23,879 crore (2,203 accounts), according to data from Cibil website. Public sector banks account for 85 per cent of the wilful defaults at Rs 292,865 crore.

Among private banks, Axis Bank had 607 wilful default accounts for Rs 2,005.9 crore, ICICI Bank 59 accounts for Rs 2,136.5 crore and HDFC Bank 49 accounts for Rs 505.5 crore. Private banks (excluding IDBI Bank) reported 1.822 such accounts for Rs 30,809 crore as of December 2022.

Among financial institutions, HUDCO had 130 wilful default accounts for Rs 12,211 crore. LIC had 3 such accounts for Rs 2,800 crore and Exim Bank 15 accounts for Rs 3,651 crore as of December 2022.

“A wilful default means a promoter who had borrowed money has defaulted wilfully. When he had the capacity to pay, he did not pay, took out the money and siphoned off. Wilful defaulters are in all segments but only large cases are being reported. Mostly wilful default is examined in accounts above Rs 25 lakh and above,” said a senior banker.

Restructuring is often misused by banks and corporates for ‘evergreening’ problem accounts to keep the reported NPA levels low. Corporates were allowed to opt for the liberal restructuring route between 2000 and 2014 when a host of companies used fresh loans from banks to evergreen their loan books. However, with the enactment of the bankruptcy code, evergreening has declined but recovery has remained abysmally low.

Wilful default numbers are likely to remain elevated for next one year. After that the numbers will decline as the recovery process would have been completed and legacy NPAs would have been resolved. “Recognition of NPAs is already over but recovery actions are still happening. These are all part of the recovery actions. Once this is over then we should see it (wilful default number) ebbing away,” said another banker.

PSU banks accounted for 75.9% of aggregate gross NPAs compared to 61.9% of advances. Overall, the stress level of the banking sector has reduced as their outstanding SMAs (special mention accounts) and restructuring book have reduced significantly in Q3FY23, indicative of improving asset quality. This comes after covid pandemic and associated business disruptions have led to an increase in restructured standard assets over the past two years, according to Care Ratings.





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As yield on 10-yr govt security falls, what should retail investors do?


While the Reserve Bank of India (RBI) in November 2021 allowed retail investors to participate in the government securities market – both primary and secondary – retail investors have not shown enthusiasm.

Should retail investors consider investing in government-backed securities?

Why are retail investors shying away?

On November 12, 2021, Prime Minister Narendra Modi launched the RBI Retail Direct (RBI-RD), a one-stop solution to facilitate investment in government securities by individual investors. The total number of registrations in the retail direct scheme since its inception stands at 99,371 as on May 22, 2023.

The number of accounts opened so far are 84,158. On average, retail subscriptions to government securities in every G-sec auction held over the past few months have been around Rs 42 crore.Total cumulative primary market subscriptions stood at just Rs 2,112.83 crore as on May 22, when the last G-sec auction was held. The total traded volume on a cumulative basis in the secondary market was Rs 351.58 crore.

“Though the RBI has developed a platform, a layman finds it complicated to invest in government bonds. They need some guidance, maybe through intermediaries, for investing in government bonds,” said Marzban Irani, Chief Investment Officer (Fixed Income), LIC Mutual Fund.

Bankers said retail investors are not enthusiastic as the G-sec market lacks liquidity. “After being allotted government securities in the primary auction, a retail investor might not always get a buyer in the secondary market at a level they want to sell and so, they are stuck. When you need money, you may not be able to get it immediately,” said a banker.

Experts believe that the scheme can pick up if the government gives retail investors some tax sops or if the investment process in G-secs is simplified like for fixed deposits.

The RBI Retail Direct platform is beneficial for an informed investor who understands the government securities market, but for an uninformed participant, investment in G-secs is advisable only through mutual funds.

Why are yields on government securities falling?

The yield on the 10-year government security, which was trading at 7.4% in early March 2023, fell to 7.3% after the government on March 24 announced changes in the taxation of debt mutual funds. The benefit of indexation in the calculation of long-term capital gains on debt mutual funds was removed. The 10-year G-sec yield eased to 7.2 % following the RBI’s surprise move to keep the repo rate unchanged at 6.5 % in its April 6 monetary policy. Currently, the 10-year G-sec yield is trading at around 6.96-6.99 %.

The yield on 5-year G-sec has fallen from 7.4 % to 6.93 %, and on one-year government bonds from 7.23 % to 6.79 %.

Besides, the fall in inflation has also pushed the yield downwards. “The yields on sovereign papers have eased as there is an expectation the RBI may go for a longer pause after April inflation fell to 4.7 %. The 10-year G-sec yield may further ease to 6.5 %,” said a banker.

Is it the best time for retail investors to go for G-secs?

Experts say that the yield on 10-year G-sec at 6.96-6.99% is a good proposition for retail investors if they want to wait till maturity. “Earlier, the yield on 10-year paper was at 7.5 %, which was very attractive for investment. You are now getting a sovereign asset at 7 %, which is still a good rate for retail investors to invest,” Irani said.

He, however, said investors should prefer investing in longer papers, having maturities of 20 or 30 years.

Apart from government bonds, he said, investors can also invest in state development loans (SDLs) through mutual fund schemes.

What are the other investment options?

“The broad advice right now is to lock into these (G-sec) rates since they are not likely to climb too much hereon,” BankBazaar’s CEO Adhil Shetty said.

One can also look at fixed deposits (FDs), where banks have started raising interest rates following the 250 basis points rise in the repo rate since May 2022.

SBI, the country’s largest lender, has been offering an interest rate of 6.8% to 7% for deposits less than Rs 2 crore and maturing between one year to less than three years. For longer-term deposits — three years and up to 10 years — SBI has been offering an interest rate of 6.5%. Senior citizens can get an additional interest rate of 0.5% on these tenors.

Similarly, private sector lender HDFC Bank has been offering interest rates of 6.6% to 7.1% on deposits maturing between one year and up to 18 months. From 18 months to up to 10 years, the bank is offering 7%. Senior citizens will get 50 basis points higher interest rates.

“If you’re going for an FD, pretty much every bank now offers 7.5 % on select tenors to senior citizens. Some banks are offering these rates for 5-10 years as well. It makes sense to lock into those tenors even for an FD, which is typically treated as a short-term instrument. In a high-rate scenario such as this, the FD can also be a long-term income generator,” Shetty said.

He said one can watch out for new bonds and NCDs being launched. AAA-rated issues in particular should be interesting. “Lastly, there’s always the option of turning to the humble post office. The 5-year deposit is being offered at 7.5%, which most large banks don’t match at this moment,” he said.





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Congress writes to RBI & Sebi, seeks probe into Adani case | India News



NEW DELHI: Claiming that the ‘PM-blessed’ Adani group is facing trouble raising funds abroad while being “heavily over-leveraged”, Congress on Wednesday wrote to the Reserve Bank of India asking for “implicit or explicit government assurances” given to the business conglomerate about a future bailout in case of financial troubles with foreign entities.
The AICC has also asked Sebi for a probe into the “overvalued” Adani scrips, and why was a high exposure of top public companies like LIC and SBI allowed into the group which has cost ordinary Indians crores of rupees in the recent market turbulence.
Congress general secretary Jairam Ramesh shot off letters to RBI chairman Shaktikanta Das and Sebi chairperson Madhabi Puri Buch, demanding probes into allegations of financial irregularities and stock manipulation, including round tripping and use of shell companies to over value the stocks, against the “influential business house”.
Addressing Das, Ramesh said RBI should ensure that “excessive debt exposure” by the Adani group does not destabilise India’s banking system, talking of a possible “contagion”. “The Adani group has been described as ‘deeply over-leveraged’ – if the Adani group has artificially inflated the value of its stock through manipulation by offshore shell companies and raised funds by pledging those overvalued shares, the recent sell-off in stock prices is creating vulnerabilities for the Adani group to find financing, and by implication for India’s banking system,” he noted, specifically seeking RBI focus on real Adani group exposure of the Indian banking system and the possible government guarantees to the Adanis that it will be given a bailout should foreign funding dry up.
“Will RBI ensure that Indian banks are not forced to step in to substitute for any shortfall in foreign financing, especially given the Adani group’s political connections,” Ramesh asked.
Talking about charges of manipulation against the business group in his letter to the Sebi chief, Ramesh said, “Apart from the potential violation of several Indian laws, this goes against everything that Sebi stands for. We urge you to investigate all potential violations and ensure complete transparency about who is investing in Adani group companies.”
He said inclusion of Adani Enterprises in the “National Stock Exchange Nifty 50 index” in September 2022 occurred despite the firm’s weak fundamentals, an excessive price-to-earnings ratio and a tiny free-float. He complained that the stock remains in key Indian indices despite global indices having suspended the group.





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In charts: Why Morgan Stanley is bullish on India and thinks sensex can touch 80,000 next year


NEW DELHI: Foreign brokerage firm Morgan Stanley has predicted that BSE sensex is expected to touch the 80,000-mark by December 2023 if India is included in global bond indices which can result in $20 billion of inflows over the subsequent 12 months.
Other factors which can propel sensex to 80,000 points include commodity prices like oil and fertiliser correcting sharply, and earnings growth compounding at the rate of 25 percent annually over FY2022-25.
But India might have to wait until early next year to see its bonds enter the JPMorgan emerging market global index as reports suggest the inclusion has been delayed due to prickly operational issues. According to Reuters, bond settlement rules and tax complexities need to be resolved before the inclusion takes place.
The brokerage firm also sees a 50% chance of the sensex hitting 68,500 by the end of 2023, assuming that the effects of the Russia-Ukraine war do not spill over into next year, domestic growth continues its strong path and the US does not slip into a protracted recession.

“India is likely to have better growth than most parts of (emerging markets), a sustained domestic bid, a relatively strong macro environment plus light positioning by foreign portfolio investors,” said analysts at Morgan Stanley.
Bull market intact: At the helm of India’s outperformance has been government policy, including a structural rise in the domestic equity saving pool, a boost to corporate profit share in GDP and a focus on FDI flows, which raised the share of FDI in balance of payments, allowing India to run monetary policy that is less sensitive to the US Fed, and reduced the equity market’s sensitivity to US growth conditions and oil prices, said analysts at Morgan Stanley.
The brokerage expects profit share in GDP to double from its current level of 4 percent to 8 percent over the next four years, indicating that broad market earnings could compound annually at 20-25 percent.
However, in a bear case scenario, the firm sees sensex dropping to 52,000 if commodity prices remain elevated, RBI tightens aggressively and recession in the US and Europe drag down India’s growth.
There’s a 20 percent probability of this, according to Morgan Stanley.
“An up-trending profit cycle, a likely peak in short rates and ebbing global macro risks relative to 2022 make the case for absolute upside to Indian stocks,” said the brokerage.
Here we decode the key reasons for Morgan Stanley’s bullish view on India:
1. Earnings: Morgan Stanley expects 2023 corporate earnings to be strong, with an improvement in margins led by a durable rise in capital spending and benign material prices. India appears to have multiple sources of capex, including energy transition, the Internet, climate change, production-linked incentive schemes,growing exports, depleted capital stock, infrastructure, real estate and FDI going into the next few years. Rising capex is good for corporate profit margins until the capex becomes unproductive, it said.

. Consensus estimates are likely heading higher

2. Market view on 2024 general elections: Given how central policy has been to India’s improving macro and stock market outperformance, the market view on the election outcome is likely to affect stock markets considerably in the second half of 2023.
3. Likely increase in net flow: Morgan Stanley expects a rise in equity issuances in 2023 which should smother some of the bid that is coming from domestic investors. At the same time, given how deep the selling by FPIs has been,FPI buying will return to India.

4. Short rates likely peaking: The brokerage expects the RBI to exit the current rate cycle at 6.5%, or 60 bps above its current level, premised on the fact that inflation is heading lower in 2023. This will likely improve liquidity conditions, facilitate further acceleration in credit growth,and help share prices.

5. Global growth and commodity complex: If the global economy slips into recession, it would not be good news for India, which exports about 20% of its output

That said, since India is gaining share in global exports, the slowdown in global growth is affecting it less than in the past. The commodity complex,especially oil and fertilizer, may have greater impact on India’s macro conditions, given the adverse impact on inflation and,hence, rates and growth. In our base case, global liquidity is likely improving in 2023, led by a peaking of the US dollar, though in a bear case scenario this may turn out otherwise, it noted.

Relative valuations: India’s relative valuations are just off all-time highs and appear to be an impediment to further outperformance

That said, India is likely to have better growth than most parts of emerging markets,a sustained domestic bid,a relatively strong macro environment plus light positioning by foreign portfolio investors.
“Based on our indicator, the market is pricing in much less earnings growth than it was at the start of 2022,” said Morgan Stanley.

Sentiment: The market still does not appear at extremes when measured on flows, holding periods, market breadth. “Our BSE sensex target of 68,500 implies upside potential of 10% to December 2023. This level suggests that the BSE sensex will trade at a trailing P/E multiple of 25x,ahead of the 25-year average of 20x. The premium over the historical average reflects greater confidence in the medium-term growth cycle in India,” said Ridham Desai, equity strategist at Morgan Stanley.

So what should investors bet their money on?
“The peaking of short-rate hikes will likely favor non-banking lending businesses, but a recovery in credit growth favors banks, too. Continuing strong domestic growth will ikely drive outperformance of consumer discretionary stocks. Growing evidence of capital spending would likely favor industrials,” said Desai.
What should investors avoid?
Avoid defensives and global cyclicals: A reversal in absolute index returns to the upside would likely be accompanied by underperformance of defensives – consumer staples, utilities and telecom. Slow global growth likely keeps the lid on performance of global cyclicals including energy and materials, he added.
Experts believe small-caps will likely outperform large-caps –the opposite of their call at this time last year.
The brokerage firm also continues to pursue ideas around clean energy spending, defence indigenisation, a new residential property, auto, and air travel cycle, a multiyear credit cycle for financials and life insurance, digital transformation, and market share concentration, plus horizontal growth for discretionary and staple consumption and electric vehicles as key themes for 2023.





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Municipalities Over-Rely On Property Tax For Financing Activities: RBI


RBI said municipalities in India over-rely on property tax

The Reserve Bank of India (RBI) said property tax reform and the development of a vibrant municipal bond market may boost the finances of local bodies in India.

Property tax accounts for around half of the total tax collections of municipal corporations, the central bank said in a report of municipal finances.

“Over-reliance on property tax has constrained exploiting other avenues of funding, such as trade licences, entertainment taxes, taxes from mobile towers, solid waste user charges, water charges, and value capture financing,” the report said.

This is the first time the RBI has come up with a detailed report on the state of financial affairs in the country’s major municipalities.

It added that property tax amounts to less than 0.5 per cent of GDP with significant inter-state variations.

Many of the larger cities were able to increase property tax collections over 2017-20, according to the RBI.

Among the major cities, Mumbai has the highest property tax collection during three consecutive financial years, starting 2017-18.

North Delhi, South Delhi, New Delhi, and East Delhi ( these have been merged into one municipality in 2022) are among the major cities that were able to increase property tax collections.

In Maharashtra, others include Pune, Nagpur, Thane, and Pimpri-Chinchwad. Chennai, Hyderabad and Kolkata also figure in this list. Bengaluru is, however, missing from the list.

“The potential of property tax needs to be fully leveraged by extending coverage, regularly revising tax rates, improving the assessment system and raising efficiency in tax administration,” the RBI said.

The report also noted that property tax had gained prominence among tax revenue sources as levies such as octroi/local body tax were subsumed in the Goods and Services Tax.

However, property tax collection in India is much lower compared to the OECD countries due to factors such as undervaluation, incomplete registers, policy inadequacy and ineffective administration. 

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Govt, LIC move to sell 61% stake in IDBI Bank


NEW DELHI: The government and Life Insurance Corporation of India on Friday finally moved to sell nearly 61% stake in IDBI Bank, along with management control, seeing off the process that has been delayed by several months.
Given the complexities, the department of investment and public asset management, which is driving the process, has proposed a two-stage step. In the first, interested parties will be screened on the specified parameters and if they meet the criteria, they will need to clear RBI’s “fit and proper” test as well as the home ministry’s security check.
In the second phase, those who make the cut will be provided the request for proposal and submit financial bids. The successful bidder will have to make an open offer, which is triggered on the acquisition of 25% stake.

To participate in the first stage, prospective bidders must submit an expression of interest by December 16.
While the IDBI Bank stake sale has been in the works for a few years, the move signals the government’s intent to go ahead with the privatisation plan at a time when analysts were expecting to go slow in the wake of crucial assembly elections as well as general elections in the first half of 2024. The sale process is being closely watched as finance minister Nirmala Sitharaman has announced plans to sell stake in two public sector banks.
IDBI Bank, which has been a problem child of sorts, saw LIC step in at the behest of the government before it slipped into the red and was among banks that saw restrictions imposed on its operations under RBI’s prompt corrective action (PCA) policy. The government believes that the lender is now in good health and an attractive bet for investors.
While RBI has made exceptions in terms of doing a fit and proper assessment at the initial stage itself, large industrial or corporate houses are not allowed to participate. Public sector companies too are not allowed to participate in the IDBI Bank sale process.
The preliminary information memorandum also mentioned that in line with the regulatory norms, voting rights will be capped at 26%. Given that the government and LIC will hold around 19% each, the successful bidder will be the only entity with veto power.
In addition, the buyer, even if it is a consortium, has to hold at least 40% of the paid-up and voting equity share capital of IDBI Bank for five years. Bidders will have to provide a 15-year glide path to reduce their shareholding in line with RBI norms.
In the past too, the government has sought to sell its stake in IDBI Bank, but the process has not gone through.





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EMIs start rising as RBI ups key rate 50bps; fourth hike in five months


MUMBAI: Reserve Bank of India’s monetary policy committee on Friday voted 5-1 to increase its key policy rate by 50 basis points, the fourth rise in five months. The latest repo rate hike, aimed at reining in inflation, will make all borrowings, home loans included, more expensive. Several banks, led by SBI have already hiked lending rates.
For those who took home loans before the May 4, 2022 rate hike, this is a major shock. Banks which had pushed rates to 6.6% will now re-price the loan at 8.5%. Borrowers who don’t have room to extend tenure will see EMIs rise by 15%.
RBI governor Shaktikanta Das, announcing the increase in the repo rate to 5.9%, hinted more rate hikes were to come. He said that after adjusting for inflation, the repo rate continues to trail 2019 levels.

SBI, others hike loan rate by 50bps
SBI & BoI hiked loan rates after the RBI raised the benchmark interest rate. The hike has been effected in their benchmark rate linked to the repo rate. Even HDFC hiked the lending rate by 50bps effective Saturday. ICICI also hiked rates, effective Friday itself. With the increase, EMIs will go up for those with loans on external benchmark-based lending rate (EBLR) & repo-linked lending rate (RLLR).

Lenders likely to come out with festive offers
RBI governor Shaktikanta Das said on Friday that after adjusting for inflation, the repo rate continues to trail 2019 levels. The rate hike was widely anticipated as the RBI is the latest among the central banks worldwide that have followed in the footsteps of the US Fed, which hiked interest rates by 75bps (100bps = 1 percentage point) on September 21.
“Consumer price inflation remains elevated and above the upper tolerance band of the target due to large adverse supply shocks, some firming up of domestic demand, and the spillovers from global financial markets,” said Das.
For new borrowers, the rates might not go up proportionately as banks can revise their spreads to charge lower rates. As the cost of funds for banks has not gone up, lenders are likely to announce special offers for the festive season. Lenders said that while higher rates do have an impact on demand, the overall sentiment is positive. The sensex gained as the policy was on expected lines and the rupee also firmed up.
RBI officials also exuded confidence on the state of the economy. When asked whether the RBI was preparing for a soft landing, RBI deputy governor Michael Patra said, “Soft landing is for the governments of advanced economies, for India it is take-off”. While the RBI cut the growth projection for FY23 to 7% from 7.2%, India continues to be among the fastest-growing major economies in the world. “The encouraging growth in the consumption pattern will continue to have a positive rub-off on the home loan demand aided by festive sentiments,” said Y Viswanatha Gowd, MD & CEO, LIC Housing Finance.





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