Midnight News Update – Aug 22nd 2017
A recent report by ICRA expects the ROE of microfinance companies to turn negative in the fiscal year 2017-18. That is not great news for these MFIs that are already struggling under the strain of bad assets and negative collection cycles. ICRA expects most MFIs to witness a sharp fall in net interest margins as credit cost and operating costs are expected to rise sharply. In fact, when demonetization was launched in November last year, the biggest hit was the MFI sector which was into giving last mile loans on behalf of larger financial institutions. Since they are cash driven sectors, liquidity virtually dried up.
The government is moving fast to ensure better realizations for Indian farmers. Last year, the farmers got hit by an excess pulse output as free imports. The government has already imposed restrictions on the import of pulses that had led to farmer realizations on pulses going up by 20% in the recent past. Now the government has imposed curbs on the import of green gram and black matpe. The import of these two items has been capped at 300,000 tonnes. India used to import both these lentils heavily from Myanmar, Mozambique, Tanzania and Malawi. Earlier pigeon peas were also placed in curb.
According to CARE Ratings, the net profits of Indian companies for the first quarter ended June 2017 had fallen by 16% on YOY basis. The lower profits were largely due to destocking by the companies in the light of the launch of GST effective 01st July this year. Even net sales of the corporate universe for the first quarter were down by 8.7%. The destocking and the uncertainty surround the GST fine print led to this situation. Among the sectors that took a big hit were consumer goods, automobiles, construction, finance and refineries. The service sector profitability also got badly impacted.
The sale of the Essar stake will enable the promoters of the Essar Group to reduce its overall debt by Rs.70,000 crore. It may be recollected that Russia’s Rosneft had just completed the acquisition of Essar Oil for a consideration of $12.9 billion. This sale also includes the sale of the Vadinar port facility along with the requisite infrastructure. Indian banks had been awaiting the deal as Essar owes nearly Rs.40,000 crore to Indian banks, principally ICICI Bank and SBI. The new owners, Rosneft, have promised to give a big thrust to the oil retailing business of Essar Oil in the years to come.
In a special presentation to the Treasury Department of the US, large and influential investors have cautioned that aggressive tapering of the bond portfolio by the Fed could lead to major value erosion in equity and debt. The US Fed currently holds $4.5 trillion dollars worth of bonds, most of which was accumulated in the aftermath of the crisis. The tapering will be a reverse of what the Fed has been doing since 2008. Under the taper, the Fed will start issuing bonds back to the institutions which will absorb liquidity in the market. So it will lead to tightening of liquidity in the market. Secondly, a taper will create tight credit conditions which will harden the yields. This hardening of yields will increase the cost of capital for equity and debt resulting in major capital erosion across global markets.
With the UK likely to lay out its clear position on the BREXIT negotiations with the EU this week, one can expect sharp bouts of volatility in the UK£. The Pound is already the worst performing among the 10 leading currencies in the world and that weakness could continue vis-à-vis the dollar. The BREXIT will mean a calibrated withdrawal from the EU post which UK will lose all its preferential trade status in the EU region. This is important as EU is the largest trading partner for UK. The modus operandi of futures private arrangements with the EU members will now be the key driver for UK.
