ICICI Puts a Lid on Project Finance Dept Amid Slacked Infra Growth

Soon after the Govt. announced the plan to revive the Real Estate sector with a fund of Rs 25k crores, ICICI, the largest lender to the infra sector till 2013, has decided to reorganize by putting the lid on its Project Finance Dept. The slack market and it’s shifting focus on retail banking pushed ICICI for this move.

Crux of the Matter
  • ICICI, encompassed by the sluggish growth, decided to transfer employees in the Project Finance Dept. to other departments, reorganizing the firm’s focus on retail banking and unsecured loans.
  • The slowdown can be interpreted from the downturn of Rs. 52,135 crore of outstanding credit by scheduled commercial banks to the infrastructure sector.
  • Asset-Liability mismatch – acquiring short term funds for long-term projects, NPA’s or bad loans, and time delay in getting statutory permits are the issues haunting this sector.
  • ICICI had reported a 28% drop in its net profit for the quarter ended September, while its gross NPA’s stood at 6.37%.

Asset-Liability Mismatch – Another factor believed to contribute to financial crises is asset-liability mismatch, a situation in which the risks associated with an institution’s debts and assets are not appropriately aligned. For example, commercial banks offer deposit accounts which can be withdrawn at any time and they use the proceeds to make long-term loans to businesses and homeowners. The mismatch between the banks’ short-term liabilities (its deposits) and its long-term assets (its loans) is seen as one of the reasons bank runs occur. Likewise, Bear Stearns, a New York-based Investment firm, failed in 2007–08 because it was unable to renew the short-term debt it used to finance long-term investments in mortgage securities. Read More


3 Years Since Demonetisation: Cash Still Rules

Crux of the Matter
  • Of the value of Rupees 15.41 trillion, Rupees 15.3 trillion or 99.3% was deposited back in the system during the demonetization drive.
  • Demonetization aimed at curbing black money, counterfeiting currency notes, terror funding, et al.
  • The aim of ‘cash-less‘ economy seems a little far away as cash in the economy in March-2019 was 120% of what it was in March-2016 in value, and 128% of what it was in March-2016 in volume.
  • The total collection of counterfeit notes is down by 50% in 2018-19 compared to 2016-17. However, RBI data says that counterfeiting of newly introduced notes of Rs. 200, 500 and 2,000 have substantially risen to 12,728, 21,865, and 21,847 respectively in 2018-19.
  • UPI payment, since introduction in 2016-17, has increased in value (in Rupees billion) from 69 to 8770 in 2018-19, overtaking the individual values of Credit Cards and Debit Cards.
  • The analysis shows that post demonetization investment as a % of GDP was also down to ~ 3% in FY 17 from ~ 7.5% in FY 16.
  • The sluggish Indian economy is still dealing with the repercussions of demonetization and GST.

Demonetisation – On 8 November 2016, the Government of India announced the demonetization of all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series. It also announced the issuance of new ₹500 and ₹2,000 banknotes in exchange for the demonetised banknotes. The Prime minister of India Narendra Modi claimed that the action would curtail the shadow economy and reduce the use of illicit and counterfeit cash to fund illegal activity and terrorism. Read More

Moody’s Downgrades India’s Outlook to Negative

Moody’s, the global rating agency, has downgraded India’s outlook to negative as India hunts for a way out of the slowdown, hinting at a persisting negative shift. Ratings for foreign currency and local currency long-term issuer are still at Baa2, Ministry of Finance announced.

Crux of the Matter
  • Moody’s has downgraded India’s outlook to negative from the stable of Baa2.
  • Moody’s showed concerned regarding India’s tapering fiscal deficit, distressed rural demand, unemployment, and NBFC crisis.
  • ‘India continues to offer strong prospects of growth in near and medium term.’ responded Ministry of Finance citing the trust of IMF, which expects India to grow at 6.1% in 2019, and at 7% in 2020, the robust measures taken to cope with the slowdown, and tenacious low bond yields.
  • S&P Global Ratings and Fitch Ratings have kept unchanged India’s outlook to stable.

Credit rating – A sovereign credit rating is the credit rating of a sovereign entity, such as a national government. The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors when looking to invest in particular jurisdictions, and also takes into account political risk. Results focus foremost on economics, specifically sovereign default risk or payment default risk for exporters. Read More

FM Announces Cash Injection in Real Estate to Rev Up Economy

In a move to shift gears of the slowing economy, FM Nirmala Sitharaman announced a corpus of Rs 25000 crores, of which 15000 crores will be funded by LIC and SBI, for the Real Estate segment. This to rev up the halted projects, which also include projects that have been declared NPA and that are under the scanner of bankruptcy proceedings. FM also aims to revitalize employment along with the cement, iron and steel industries through this move.

Crux of the Matter
  • In the Real Estate segment, as a part of the government’s effort to revive the economy, as many as 1600 projects, containing 458,000 household units, will get aid under this announcement.
  • With the help of the category II Alternative Investment Fund, the pooled amount would assist the project homes with a value of less than Rs. 2 crores in the Mumbai, Rs. 1.5 crores in Delhi-NCR, Kolkata, Pune, Bengaluru, and Chennai and less than Rs. 1 crore across other parts of India.
  • The Real Estate Segment that is struggling since demonetization and IL&FS crackdown is expected to show positive reaction. This will als hrlp in reviving domestic demand.
  • The home-buyers who have halted their EMI’s on account of paused projects will now be asked to continue soon after the RBI nod.

The United States housing bubble was a real estate bubble affecting over half of the U.S. states. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and reached new lows in 2012. On December 30, 2008, the Case–Shiller home price index reported its largest price drop in its history. The credit crisis resulting from the bursting of the housing bubble is an important cause of the 2007–2009 recession in the United States. Read More