Business

After a quick look at points highlighted in the Economic survey – a precursor to the FY23 Budget, let’s look at what FM Nirmala Sitharaman had to say for Tax Payers and theMicro Small Medium Enterprises (MSMEs).

No Change in Taxation (H1)

Every year, the common man expects several things from the Budget. A major expectation revolves around ‘Taxation’. 

This year too, the common man expected FM Nirmala Sithamana to decrease tax rates. He/she expected the Budget to present tax rate and surcharge reductions, an increase in the deduction amount available under section 80C, an increase in the housing loan repayment exemption, dividend tax relief, capital gains standardization across different asset classes, the removal of securities transaction tax (STT) and the exclusion of GST on services provided to the general public.

However, the Budget didn’t fulfill any of these expectation. The Budget maintained its status quo on Income tax rates. Here is how taxpayers will pay taxes this year.

• Personal income tax slabs remains as it is (H2)

In the shortest Budget speech ever, FM Nirmala Sitharaman, didn’t pronounce a single word that would sound like a melody to the taxpayers’ ears. No change came out of finance ministry’s kitty. 

An individual tax payer will continue to pay as per the existing tax slabs, depending on the tax regime that he/she selects for FY23. Under both income tax regimes, tax rebate of up to Rs. 12,500 is available to an individual tax payer under section 87A of the Income-tax Act, 1961. This means that anybody with a net taxable income of up to Rs. 5 Lakh would not be taxed irrespective of the tax regime he/she chooses.

• The difference between two tax regimes (H2)

There are two different tax regimes. You need to know the difference between the Old and New tax regime to decide which one to pick. Under the New Tax Regime an individual tax payer misses almost 70 income tax exemptions and deductions but gets taxed on lower rates. On the other hand, under the Old tax regime an individual can avail deductions/tax exemptions such as 80C, 80D deductions, HRA, LTA tax exemptions, etc. 

Sometimes no change can also be a good thing. 

A Mixed Bag for MSMEs (H1)

Just like the taxpayers, MSMEs also expected several things from the union Budget. And it accurately delivered on the sectors’ needs. MSMEs contributes ~29% towards the GDP, so it is important for the finance ministry to pay heed to their needs. 

There have been many MSME-centric announcements this time. The budget extended the Emergency Credit Guarantee Scheme (ECLGS) till March 2023. Moreover, the FM added another Rs. 50,000 crore to the ECLGS for the benefit of hospitality and other allied sectors. 

Pushing for digital transformation among MSMEs, the sector-centric portals such as Udyam, e-shram, NCS & Aseem would be inter-linked to widen their scope. These portals will now encompass organic databases and provide services such as credit facilitation and offer entrepreneurial opportunities. 

The Budget proposed a digital ecosystem for skilling and livelihood. Theaim is to skill, reskill and up-skill citizens through online training. 

The finance minister Nirmala Sitharaman, unveiled a World Bank- funded initiative RAMP (Raising and Accelerating MSME Performance). Though the finer details about the initiatives are not yet public, the Federation of Indian Micro Small & Medium Enterprises (FISME) is happy with the announcement. It expects a speedy economic recovery for MSMEs.

While most of the MSME sector welcomed the announcements, the Budget failed to cheer certain sections. FISME President, Animesh Saxena says that he was expecting specific measures focused on “medium” firms. But nothing came from the Budget. 

Moreover, micro and small enterprises were looking for an incentive package, but it did not materialize. Like any new startup that enjoys interest subvention for 3 years, there is no investment scheme for new MSMEs. 

While the feelings are mixed, the one thing to take away from this Budget would be the idea that the government want to emphasize on growth and economic revival of all sectors and not just certain audiences like the tax payers or the MSMEs.

This conservative budget leaves room for the ministry to maneuver in case of pandemic-related issues and imported inflation too that rising global prices may cause. 

We hope we’ve given you a better idea of the Budget. If you’ve liked this chapter don’t forget to share it with your friends and family. 

In the meantime, subscribe to the 5 in 5 Wealth Creation Strategy and begin creating wealth.

Read more:  How Long-term investing helps create life-changing wealth – TOI. 

Looks like coronavirus will be a part of our lives and we may have learn to live with it. Come winter and we have a new variant Omicron making thousands ill with numbers growing every day. Whether you are back to working from home or going to office on alternate days, forgetting your resolutions of Financial Fitness is a Big No.

Like improving your health, and being fit are part of your to-dos, you must add financial independence to that list too.
To all those who want to stick to their plans made at the beginning of the year, here’s our guide to your physical and financial fitness.

We are sure you will enjoy reading this chapter as much as we did while writing it.

5 Effective Mantras for Financial Fitness

Financial Fitness – THERE IS NO SHORTCUT TO HEALTH OR WEALTH

Ogling a video or poster won’t help you get Disha Patani’s perfect body or Tiger Shroff’s rippling muscles. You’ve got to sweat it out to develop that kind of fitness. Select any approach you want – pump iron, swim, run long distances, cycle challenging terrains or anything that gives you a kick. The key is to be regular and consistent. . Don’t expect miracles overnight; they are neither possible nor healthy. Give your best shot every day, and watch the miracle unfold gradually.

The plan does not differ much with your portfolio investments either. You won’t make money if you admire star investors’ portfolios. You must work towards building a formidable portfolio yourself. And it takes time. You must study businesses, talk to managements, customers, suppliers, dealers, fellow analysts, do channel checks, study company’ financials and check corporate governance issues (if any). There is a lot of hard work that goes behind building a portfolio of stocks that will compound your wealth year after year. There’s no shortcut here.

CONSISTENCY, PATIENCE AND PERSEVERANCE

Fitness is not a weekend job, nor is it one-dimensional. Youmust exercise regularly, regulate your diet, get adequate sleep, handle stress effectively, and juggle between work and personal commitments. None of these can take a backseat; not even for a while. You must be consistent with your efforts, patient with the results, and persevere despite obstacles.

Your equity portfolio also demands a regular regimen of reading, researching, and discussions with your financial advisor. . It’s not every day you come across a stock that qualifies as a multi-bagger. If your portfolio does not underperform the benchmark indices, you’ve made a start. And, if you can beat the index, you’re improving.  If you can do that year after year, you’ve become a pro. The whole journey of wealth creation takes time, effort, and commitment from you, but the results will be gratifying.

DON’T FALL FOR “INSTANTRESULTS” WEALTH CREATION

There will always be miracle drugs available to instantly boost sports performance or muscle growth. Don’t fall for any of these “miracles”. They are dangerous and will only ruin your health over the long- term. Real fitness comes from actual practice and actual exercise; not through shortcuts.

Similarly, wealth creation doesn’t happen when you follow sure-shot tips, or “chase momentum, or run after penny stocks. You build wealth by giving time to your investments. As a famous saying goes, “Time in the market is more important than timing the market”.

THERE WILL BE DISRUPTIONS, DON’T WORRY

While you will stick to your fitness plan as much as possible, there will be days when things will go “off-plan”. This could happen due to health reasons, personal/professional commitments or numerous other reasons. It’s okay, and it’s expected. The key is to get back to your regimen as soon as possible.

You may need to withdraw some of your equity investments, which were meant for the long term, for unforeseen reasons. Secondly, you may not be able to invest for a few months due to liquidity demands elsewhere. The key is to get back to the investing as soon as things normalise. Abraham Lincoln famously said, “It’s not about how many times you fall, but how many times you get back up”.

TO HELP YOU REACH YOUR GOAL FASTER, HIRE A COACH FOR Financial Fitness

Without a doubt you have to do all the heavy lifting yourself. However, getting an expert to coach you can help a lot. I can personally vouch for this – as an aspiring marathoner a decade ago. My performance picked up as soon as I joined a running group trained by an expert coach. There are other benefits as well – you meet new people, learn from their experiences, and make new friends.

In your wealth creation journey through equity, you should be vigilant regarding your investments and decide on the financial risk yourself. However, you can always hire experts (like us at Research and Ranking) to handhold you in your wealth creation journey.

We don’t promise miracles or overnight success. We do promise a disciplined and effective way of long term wealth creation.

We hope you make use of the 5 Effective Mantras for Financial Fitness we’ve shared with you today. If you like this article share it with your friends and fellow investors.

Government and investor pressure is pushing businesses reliant on fossil fuels to focus on their green energy initiatives and cut carbon footprint.

Yesterday, we saw the efforts and the steps Reliance Industries is taking to ensure it meets the ambitious green energy goals by 2030. Today, we look at Adani Green Energy and its efforts to triple its renewable capacity in a decade.

The Beginning – Adani Green Energy

Adani Green Energy was set up in 2015 to deal with any power or electrical energy using conventional fuels or alternative energy sources like wind, solar, tidal energy, etc. Switch to now, the group aims to become one of the largest green hydrogen producers globally to aid India’s efforts to become the cheapest producer of hydrogen in the world.

For several years the Adani Group extracted coal, produced coal-fired power at plants like Mundra in Gujarat, docking the coal vessels at one of their ports.

Adani has been embroiled in environmental issues frequently. But, in the last three years, Adani Green has quickly amassed a 20GW solar, wind, and hybrid electricity portfolio. The Adani Green Energy Ltd. shares have grown 13-times in the last two years. 

When Reliance entered the green-energy race in June this year, Adani too announced they would invest $20Bn in renewable energy in the next ten years.

The group’s organic and inorganic investments in the green energy value chain will be $50-70Bn. Adani Group Chairman Gautam Adani said, \”This opens up several new pathways for us, including setting us up to be one of the largest green hydrogen producers in the world.\”

 Let us understand the initiatives Adani has taken recently to fulfill its green energy commitments.

Adani’s Ambitious Plans

Adani Green now produces 25 GW of renewable energy ahead of its schedule. They plan to triple their green power generation capacity in the next four years to 63%, up from 21% now. The company has 4,920 MW of operational capacity with plans for 9430 MW assets under construction. 

Adani plans to increase its power generation capacity and to do that it acquired two energy companies.

• SB Energy India: Adani Green Energy bought SB Energy India for $3.5Bn, in an 80:20 joint venture between SoftBank and Bharti Group in India. The deal is the largest acquisition in the renewable energy sector in India. SB Energy is leading utility-scale solar, energy storage, and technology platform.
• Essel Green Energy’s SPV-owned solar plant: Adani Renewable Energy (MH) Limited, a subsidiary of Adani Green Energy acquired a 100 percent stake in a 40 MW solar project in Odisha for $32Bn. This plant has a long-term power purchase agreement with the Ministry of New and Renewable Energy-operated Solar Energy Corporation of India (SECI) at Rs. 4.235 per unit. This acquisition will help Adani achieve a total renewable energy capacity of 19.8GW.
• The Adani Group aims to make its ports carbon net-zero by 2025. It will power all data centers using renewables by 2030 and spend 70 percent of its CAPEX on green technology.  .  

The Adani Group now is India’s largest private sector power producer, the largest private airport operator, the largest private port operator, and now the largest infrastructure developer in renewables. It has the largest private consumer gas and electric utility business, the largest private electric transmission company. Adani’s have acquired over 50 assets amounting to about $12 billion in the last eight years.

Adani seems to be on its way to becoming the largest producer of renewable energy. Yet, it has also forayed into the petrochemicals industry setting up refineries in Gujarat. The messages seem to be conflicting. The Adani’s are increasing their renewable production capacity and acquiring green businesses. It is also entering the oil and gas industry, one of the biggest culprits of carbon emission. 

An all-weather alternate energy solution is the need of the hour to exploit the abundantly available atom instead of removing hydrogen from coal or methane. With no clear roadmap on the horizon, the actions conflict commitments mad. Will the Adani’s fulfill their goals?

Well, only time can tell.

Need sound advice on where to invest, how much to invest and for how long to invest in the stock market? Subscribe to our 5 in 5 Wealth Creation Strategy and get a portfolio of 20-25 fundamentally sound stocks and start your wealth creation journey.

Read more: 
How Long term investing helps create life-changing wealth – TOI 

Best Renewable Energy Stocks in India – Research & Ranking

*Disclaimer: The information mentioned in this blog is for educational purposes only. Please do not consider it a recommendation to buy/sell/hold from Research & Ranking.

Yesterday we spoke of the rapid changes in the Renewable Energy sector and how Billionaire Barons in India are racing to add the best clean energy businesses to their portfolio.

Here is a deep dive into Reliance’s foray into green energy.

Reliance Industries Ltd (RIL) AGM’s have become synonymous with surprise announcements, and the 44th meeting on 25^th June 2021 was no exception.

The AGM agenda had several initiatives like the JV with Google for its Android phone launch in September, the retail expansion plan, and the surprising Rs.75000cr allocation for green energy investments in the next three years.

This ambitious move to green energy from fossil fuels may have surprised Reliance shareholders. But it is in line with the Prime Minister’s vision to accelerate India’s venture into renewable energy production and use.

Experts believe Reliance foraying into green energy will spur others into taking action in this sector. The company’s ability to build cost-efficient end-to-end chains in O2C and retail may help to make their solar and energy storage businesses a success.

Mukesh Ambani unveiled his ambitious renewable energy dream. Let us understand the steps taken:

Creating the Council of nine: Mukesh Ambani has enlisted eight global technocrats to his nine-member New Energy Council. This council of advisers to governments will help the oil-to-gas business become a green energy giant.

The national research professor and independent director at RIL, R Mashelkar heads the council. Alan Finkel, special adviser to Australia on low emission technologies and national hydrogen strategy; Draper Prize winner for engineering, Rachid Yazami; Director of MIT’s energy initiative, Robert Armstrong; the father of photovoltaic, Martin Green; David Milstein, an expert at splitting water,  innovative energy storage systems, and carbon capture, utilization, and storage; Professor of energy engineering, Imperial College, Geoffrey Maitland and the pioneer of modern wind industry Henrik Stiesdal make up the council with Mukesh Ambani. 

The council will validate RIL’s plans for a tech-based system to make clean and affordable energy in 5-15 years. They guide on technical plans, ascertain opportunities, and counsel on partnerships worldwide.

RIL’s Partnerships: Reliance has partnered with green energy businesses in solar, battery, and hydrogen, which could contribute around 10% of the company’s pre-tax profits in five years.

• REC: Reliance New Energy Solar Ltd (RNESL), the new subsidiary, acquired a stake in Norway-based REC Solar Holdings AS for 5782cr. REC manufactures polysilicon, PV cells, and modules with plants in Norway and Singapore.
• Sterling & Wilson: RIL bought a 40% stake in Sterling & Wilson Solar Ltd, a leading EPC and O&M firm in renewables for 2850cr. They provide a comprehensive range of solar energy turnkey solutions. The solutions include design, procurement, building, project supervision, processes, and administration.
• NexWafe: RNESL invested 337cr is a Germany-based firm NexWafe. It will give the Ambani’s access to NexWafe’s methods and expertise to manufacture solar wafers. RNESL will support NexWafe in completing the commercial development of its PV products on prototype lines in Freiburg. RNESL and NexWafe together will develop technologies and commercialize mono-crystalline ‘green solar wafers’ in India.
• Stiesdal A/S: RNESL signed a cooperation agreement with Denmark-based Stiesdal A/S to develop technology, manufacture HydroGen Electrolyzers. They will collaborate on the development and implementation of new climate change technologies such as offshore wind energy, next-generation fuel cells to convert hydrogen to electricity for mobile and static generation, long-duration energy storage, and carbon-negative fuels.
• Ambri: RNESL will invest around 371cr to acquire 42.3 million preference shares in Ambri, the Massachusetts-based company. The investment will help Ambri monetize and grow its liquid metal batteries for energy storage globally.

Dhirubhai Ambani Green Energy Giga Complex: RIL will develop a 5000-acre DAGEGC in Jamnagar, Gujarat. This complex will house the green energy factories manufacturing solar-grade polysilicon, solar panels, and modules, metallic silicon. These acquisitions and partnerships will help RIL expand its capacity to 10 GW from 4 GW and aid in Reliance’s goal to produce 100 GW of green energy before the end of 2030. 

The commitments and steps taken will tell you RIL is building a fully-integrated end-to-end renewable energy ecosystem for customers through solar, batteries, and hydrogen. No other company is financing the complete new energy value chain like Reliance. If Ambani’s pull-of their ambitious plan for green energy then the earnings will be significant.

Of course, like all plans, there could be several issues. Fossil fuel companies across the globe have not been able to transition to renewables.

Technologies for advanced storage and fuel cells are a work-in-progress. Despite considerable investment in the development of new energy technologies, the US government had modest results. Materials science in India is under-developed, while advanced technologies like Cobalt, lithium, and nickel are not available commercially.

RIL forays into a market with a thorough study and detailed roadmap. It could mean a complete disruption in the green energy sector or a disaster in the making. We will have to wait for the results and the impact of its decisions on the industry.

If you have liked this article, please share it. Look for our next on Adani’s ambitions for green energy.

Read more: Renewable Energy – The World’s Favorite Energy Source Today!

Read more:  How Long-term investing helps create life-changing wealth – TOI. 

Tata Chemicals Fall in 2021 – The result season is on and looks like the markets are in correction mode. Is it a matter of concern? You will hear different answers from different people. Here is what we have to say and perhaps it is a right answer.  

Sure, the market’s corrected today. Both NIFTY and SENSEX were down ~2%. NIFTY Midcap 100 and NIFTY Small Cap 100 were also down ~2%. Several investors’ favorites like Tata Chemicals, Nalco etc. tumbled 10%-30% in October.

Why Did Tata Chemicals Fall in 2021?

But why did that happen?

There are several factors bothering the stock markets and fundamentally sound companies. For instance, look at Tata Chemicals.

Tata Chemicals announced its quarterly results yesterday and the next day stock plunged ~10%.

The company posted 88% jump in its Q2FY22 consolidated net profit to Rs. 248crore, while the net profit stood at Rs. 132crore the same quarter last year. A rebound in soda ash volumes in the U.S. and India predominantly aided the jump in profit.

The expenses rose to Rs, 2,805.45 crore from Rs. 2,499.16 crore in the year ago period due to rising raw material and power cost, which is an industry wide pain point.

Thus, companies from the chemical industry are experiencing high-pressure at operating margin or EBITDA level.

Tata Chemicals MD, R Mukundan said, “With the re-opening of businesses in all markets, the overall demand environment continues to be positive. While this positive momentum is expected to continue, the supply-side environment especially on energy costs and supply chain poses a challenge.”

The problem will continue to bother the industry in the near term. However, we feel that the disruption that the company is facing currently is more temporary in nature and in the long term Tata Chemicals could be a beneficiary of the structural shift that is happening in China due to stringent environmental norms.

Why did Nalco fall?

Second in the list is the National Aluminum Company Ltd. (Nalco). The internet is abuzz with queries like “why did Nalco fall, “the reason behind Nalco’s fall” etc.

Today the stock ended ~24% lower from the month’s high of Rs. 127.

Sharp increase in input costs (raw material) is one of the reasons for the fall in the Nalco’s stock price. 

The monsoon season has not been kind to coal miners impacting the production in several states of India especially in the Eastern region.

The steep increase in input costs is expected to dent margins in the near term. Though Nalco has captive mines and enough sourcing from Coal India, the increased demand and global demand supply gap for coal has impacted Nalco.

So, the management stated they would import some amounts of coal in order to continue their production. The import cost can increase the total cost of production in the near term.

Apart from input costs, the logistics/freight costs are also rising, which will impact the profitability of the likes of Nalco.

The question is how should you look at this correction of Tata Chemicals?

Wise investors would look at this correction in fundamentally sound companies as an opportunity to buy as these stocks are cheaper now. Ordinary investors, on the other hand, would believe it is a bad time to invest. He/she would wait till the stocks return to their pre-correction levels.

A wise investor looks at a dip in price as an opportunity while an ordinary investor looks at a rise in price as an opportunity.

So, you must decide, which one do you want to be.

The country has undergone tremendous positive changes over the last few months. These developments and key policy reforms mean India is poised for growth.

Here are a few major developments-

Big Trillion Plan- Last month, the Government unveiled a four-year National Monetization Pipeline (NMP Vol 1 & 2) worth an estimated Rs. 6 lakh-crore. This plan aims to unlock value in the Infrastructure Line Ministries’ assets. The Creation through Monetization philosophy is directed at tapping private sector investment for new infrastructure.

Retails investors contribute to the rally– 15.2 Million Retail investors have added to the investor base since April 1. This implies retail investors are no more riding pillion but are major contributors to the recent rally.

The sixth largest stock market- India became the world’s sixth largest stock market, overtaking France for the first time in market capitalization.

FIIs Continue the Buying Spree- The fear of taper tantrum has reduced. Irrespective of negative comments from the bankers around the world, the Foreign Institutional Investors (FII) continue their buying spree. The NSDL data says, FIIs buying stood at Rs. 2.28 trillion in September.

PLI Scheme- The government approved a Production-linked incentive (PLI) scheme for the textile sector worth Rs. 10,683 crore. The automobiles and auto components industry is set to receive an outlay of Rs. 25,983 crore under the PLI scheme.

NBFCs loosen their Purses- After a brief pause during the COVID-19 pandemic, the NBFCs and Banks have begun filling creditors’ pockets as the demand for loans picks up. Edelweiss and IIFL are now lending Rs.4, 000crores a month. The country’s largest mortgage lender HDFC Ltd. is witnessing a remarkable rise in home loan demand similar to pre-COVID levels. 

Bad Bank to tame the Worsts: After its announcement in the FY22 Budget, the Union Cabinet approved 30,600core government guarantee for the National Asset Reconstruction Company (NARCL), facilitating the formation of Bad Bank.

With all these and other developments happening in the periphery, you must look at the bigger picture instead of fearing short-term corrections in the stock market and waiting for the right time to invest.

Today, the Sensex is above 60,000. Sure, it’s a big number. But can you imagine how high the stock market will be, if all things fall in place as planned.

Nick Murray’s quote says it for us

“Timing the market is a fool’s game, whereas time in the markets is your greatest natural advantage.”

Need sound advice on where to invest, how much to invest, for how long to invest in the stock market? Subscribe to 5 in 5 Wealth Creation Strategy and get a portfolio of 20-25 fundamentally strong stocks tailored to your goals and risk taking ability.

*Disclaimer: Information mentioned in this email is for educational purposes only. Please do not consider it a recommendation to buy/sell/hold from Research & Ranking.

Read more:Timing The Market Is A Fool’s Game – Look At The Big Picture

Read more: About Research and Ranking.

Have you heard of the mills that became defunct and had to close down? What about companies that set up operations and then suddenly disappeared? Well, if you asked someone a few decades ago what happened to XYZ Company – the pet   buzzword would have been Woh company ka deewala nikal gaya.

Did we not have laws governing insolvency, bankruptcy before the IBC code in 2016?

We did have several provisions such as

• The Sick Industrial Companies (Special Provisions), Act 1985,
• The Provincial Insolvency Act 1920,
• The Presidency Towns Insolvency Act, 1909,
• The Code of Civil Procedure, 1908, and the SARFAESI Act, 2002.

With so many provisions and changes, why then did we need a new IBC code?

India has several provisions and laws for liquidation and bankruptcy, yet, these laws did not solve complex issues while NPA kept rising.  These disparate provisions did not fulfill the purpose they were established for. What companies needed was a one-stop solution for insolvency, which was missing.

What went wrong with the previous provisions?

• The Sick Industrial Companies Act, 1985 failed as it considered the final balance sheet to detect insolvency instead of looking at the sick company’s future cash flow.
• Section 424A and 424L introduced in the Indian Companies Act, 1956, to deal with revival were never enforced.
• The Recovery of Debts due to Banks and Financial Institutions Act, 1993, planned special Debt Recovery Tribunals and the Debt Recovery Appellate Tribunals to unlock the public money and use it to develop the country. However, this act did not apply to those banks and Financial Institutions (FIs), which had less than Rs. 10lakh in dues.
• The SARFAESI Act, 2002, considered the interests of only secured creditors to act against the borrowers. However, this act failed to consider unsecured creditors’ rights while taking action.
• The corporate debt restructuring mechanism (CDR) in 2001 was for banks and FIs with exposure, not more than Rs. 10cr. CDR was non-statutory and voluntary or based on an agreement between the creditors and borrowers to restructure debt.
• RBI announced the Strategic Debt Restructuring in 2015 to change the company management to deal with stressed assets. SDR did not solve as many cases as expected.

In 2016, the Government enacted the Insolvency and Bankruptcy Code (IBC) after the previous laws were either time consuming, using the wrong approach or indicator to detect bankruptcy. With several merger and acquisition cases coming to the surface, Insolvency and Bankruptcy Code, 2016 has become a talk of the town. So, this week we take a deep dive into recent cases of   IBC one at a time.

Read more:  How Long-term investing helps create life-changing wealth – TOI. 

Ratan Tata’s tweet “Welcome home, Air India,” says it all. Not only did the Tatas rejoice, but so did the country. It was a landmark victory for the salt to automotive conglomerate. If you are like us; then, you had several questions in your mind as soon as you heard the news.

The topmost would be –How will the Tatas revamp Air India? Do they have a plan of action in the works?

Yes, they most certainly do have a plan.

The final chapter in our Maharaja’s Flight Back Home series takes a deep dive into the plans and the changes that may follow to revamp Air India’s fleet, operations, and reputation.

What the Tata’s get from the Government

The Tata’s get access to aviation assets, which take years and tons of money to build. The Group will get 118 from the 141 planes in Air India’s fleet. This lineup will include 58 Airbus A320 family planes, 14 Boeing 777, 22 B787 Dreamliner of AI, and 24 B737 of AI Express in flight-worthy condition. A good mix of narrow and wide-body airplanes and a trained workforce will make the Tata group tough contenders in the aviation space.

According to a Reuters report, the Tatas will now have entrees to slots at hectic foreign airports, profitable destinations such as the Gulf due to bilateral flying rights between foreign nations. The Tatas can now make the most of India’s Star Alliance Global Network membership.

The deal includes 100% of Air India’s money-making low-cost arm Air India Express, 50 percent of AISATS that offers cargo and ground handling services at major Indian airports. Tata Sons will control Air India’s 4,400 domestic, 1,800 international landing and parking slots at domestic airports, and 900 slots at overseas airports.

Adding Air India’s 100% stake to the majority stakes in budget airline Air Asia India and full-service carrier Vistara gives Tata Sons an unmatched advantage.

Now you know what’s in Tata’s basket. Here is a look at the SWOT Analysis for Air India.

Tata’s plan for revival and turnaround.

The turnaround of the loss-making behemoth Air India will not be easy, but the Tatas have a plan. The group intends to make extensive changes at the former national carrier to cut costs and streamline operations ensuring a better position among competitors. Some of the changes planned are:

• Appointing a new Board once the government transfers the carrier to Tata Sons by December 2021.
• The holding company, SPV M/s Talace, and Tata Sons plan to put a new leadership team for the carrier.
• The company plans to tap into TCS and TajSATS capabilities to change Air India’s existing operating model and cost structure. In the words of a Tata group executive, “Did you know TCS runs the IT systems and applications of most national carriers of other countries, except India? Once the deal concludes, TCS will step in to manage A to Z of Air India’s IT and digital operations.”
• Doing so would improve the carrier’s efficiency reducing operational and maintenance costs. TCS manages Vistara’s technology and IT and digital systems for Singapore Airlines, the second-best carrier globally.
• A new CEO will be appointed, while the finance team will work to fix the commercial issues like reducing lease liabilities, renegotiating vendor contracts, and refinancing expensive debt. They will also leverage their relationship with Boeing and Airbus to get better aircraft replacement deals.

These changes are just the beginning. We now have to wait to see how things shape up and if Air India regains its standing and reputation.

Liked this article? Share with your friends. In the meanwhile check our 5 in 5 Wealth Creation Strategy and subscribe.

Read more:

The Maharajah Finds Its Way Back Home To TATAs

What Will Tata Do With Three Airlines In Its Stable Now?

Read more:  How Long-term investing helps create life-changing wealth – TOI. 

What Will Tata Do With Three Airlines In Its Stable Now?

The Prime Minister Narendra Modi said, “The government has no business to be in business,” earlier this year. It was an announcement of the Government’s ambitious disinvestment and privatization plan, and Air India’s sale is the beginning of it.

In the previous article we saw, the government deplaned the national carrier and sent it back to who it belonged to – the Tatas. However, the question now is “What will the Tatas do with Three airlines in their stable?”

Yes, THREE Airlines! Besides Air India, Tata has holdings in two major airlines. The group has Vistara, a joint venture with Singapore Airlines Ltd. for full service domestic and international flights. They also hold a majority stake in a low-cost carrier Air Asia with serious Malaysian entrepreneur Tony Fernandez.

For starters, here is a bit about Vistara, Air Asia and Air India.

Air Asia (India)

Headquartered in Bangalore, Air Asia (India) is a joint venture (JV) between Tata Sons and Malaysian entrepreneur Tony Fernandez’s Air Asia Investment. Air Asia is the first foreign company to set-up a subsidiary on the Indian soil.

After the government nationalized Tata Airlines to form Air India, Tatas bade goodbye to the skies. It is Air Asia that brought the salt to automotive conglomerate back to the flying business after 60 years. Air Asia (India) began operations on June 12, 2014 with Tatas owning 51% stake. In December 2020, Tata Group increased its initial stake to about 84% from 51%.

Currently, Air Asia (India) has 28 aircrafts covering 17 destinations across the country with 240 direct and indirect flights. 

Tata SIA Airlines

Tata SIA Airlines, a joint venture between Tata Sons and Singapore Airlines, operates under the brand name Vistara, a domestic and international full-service carrier. Tata sons holds 51% stake in the JV while Singapore Airlines owns the remaining 49% stake.

The company was formed on November 5, 2013. Vistara took its first flight on January 9, 2015 from Delhi to Mumbai. In the last six years, Vistara has rapidly expanded its standing, both in terms of network and service proposition. Currently, the airline has a fleet of 45 aircrafts – 

• 35 Airbus A320,
• 6 Boeing 737-800NG,
• 2 Airbus A321neo
• 2 Boeing B787-9 Dreamliner.

Air India

Tata won back Air India from the government after a decade-long bidding. Post-acquisition, TATAs will own 100% stake in Air India and its subsidiary Air India Express. It is a low-cost carrier airline that focuses on short-haul international operations, especially in Middle East. TATAs will own 50% stake in the Air India SATS that offers on ground and cargo handling services. Besides, it will get a large pool of 13,500 permanent and contractual human resource.

Brands like Air India, Indian Airlines and the Maharaja will come under the TATAs ownership. Currently, Air India has a fleet of 118 wide-body and narrow body aircrafts and AIXL has a fleet of 24 narrow body aircrafts.

Race to gain Market Share

It’s an opportunity for the Tata group to gain a noteworthy market share in the Indian aviation industry. Indigo dominates the industry with 57% market share as of August 2021. Spicejet that sits on the 2^nd spot lost its market share from 16.8% in June 2020 to 9.1% in June 2021 because of the pandemic.

With Air India, Vistara, and Air Asia having a current combined market share of 26.9%, the salt to airline conglomerate will emerge as the second-largest domestic airline after Indigo once all three airlines consolidate operations.

Final Words

We think consolidation is the way forward for the Tata Group. Tatas love for the flying business is not new. However, despite flying major airlines, the Tatas flying affair has not brought them much business success. As the COVID-19 pandemic marred air travel, Air Asia booked a loss of Rs. 1533cr in FY21 while Vistara recorded Rs. 1,612cr in loss.

Only time can answer how things turn out for both Air India and its former parent.

Look out for the next article, where we delve more into Tata’s plan for Air India’s turnaround.

Meanwhile, subscribe to our 5 in 5 Wealth Creation Strategy and start your wealth creation journey today.

Read more: The Maharajah Finds Its Way Back Home To TATAs

Read more:  How Long-term investing helps create life-changing wealth – TOI. 

68 years after Government nationalization the Maharajah finds its way back to the TATAs making 8^th October 2021 a landmark day for the TATA Group.

The TATAs won the bid for 100% share in the national carrier last week. Tata’s SPV Talace submitted the winning bid of 18000cr, beating Ajay Singh’s offer of 15100cr enterprise value. This successful sale of the national carrier is the beginning of the Centre’s privatization plan bringing an end to its 10-year quest for a buyer.

The Beginning

Air India story began in a tiny airfield in Karachi. Then Karachi was still a part of India.  On a balmy morning of October 15, 1932 JRD Tata took off for Chennai in a single-engine Puss Moth plane. It was India’s first-ever private weekly mail service.

1946 saw JRD Tata’s fledgling airline carrying one of three passengers in India while it owned nearly half the 50 plane fleet by that time.

1948, Air India went international, and then it grew, getting a worldwide reputation and recognition.

The Government Bungle

The government took over Air India in June 1953 despite India’s debt-ridden aviation industry that had too many airplanes and airlines shutting down. The government merged about a dozen airlines of which Air India was the best operator. 75% of foreigners visiting India traveled in Air India by 1968 and it continued to shine till the 90s. Come the 90s and things with the carrier went downhill. Brutal competition and the merger with domestic Indian Airlines in 2007 were further reasons for the downfall.

Since 2008, the carrier has banked on taxpayer-funded bailouts to stay operational. Air India had losses to the tune of ~$ 2.6mn per day with a debt of more than $8bn. Its on-time performance and service deteriorated though it had some of the best pilots in the industry. The carrier has come a full circle and is now back with Tata.

The decade-long Buyer hunt

The national carrier was making losses every day and racking up debt since its merger with Indian Airlines in 2007. The government had no option but to sell its stake, which took two decades and three attempts for the carrier to change hands.

Here is a look at the disinvestment plan over the years

2000 -2001: NDA government tried to sell 40% of its stake

Under the Atal Bihari Vajpayee, the NDA government tried to sell a minority stake, i.e., 40% in Air India. Singapore Airlines with the Tata Group were interested in buying the stake. However, they pulled out due to the trade union’s objections to privatization halted the government’s disinvestment plan.

2012: Financial restructuring plan

The UPA regime approved a turnaround plan (TAP) and a financial restructuring plan (FRP) for Air India to mitigate the losses.

2018 March: Government invites EoI to sell 76% of its stake

The Cabinet Committee on Economic Affairs gave in-principle approval for the strategic disinvestment of Air India and five of its subsidiaries. The Centre invited expressions of interest (EoI) to buy 76% of its stake. The buyer would have to take over ~70% of the debts amounting to 33,392cr.

The deal included a 100% stake in Air India Express, Air India’s low-cost subsidiary, and a 50% stake in the ground handling arm AISATS. However, till the end of May 2018, the government did not receive any bids. The chief reasons for no EoIs were the Centre’s retention of 24% of Air India’s stake and too high a debt takeover amount. 

The final Buy-out

2020 January: Government invites EoI for 100% stake in Air India.

The Centre invited fresh EoIs to acquire the airline in Jan 2020 for 100% stake unlike its attempts to sell before. The new deal included 100% stake in Air India Express and 50% in ground arm AISATS.

The Centre lowered the debt. The buyer would takeover to Rs. 23, 286cr from its total debt of Rs. 60,074cr in March 2019.

October 2020 saw a further relaxation in the terms. The government let the buyers decide on the amount of debt they were willing to absorb. The Centre received multiple offers, but they extended the deadline five times till 14^th December 2020. The pandemic added to the delay in the process.

The government invited financial bids in April fixing 15^th September 2021 as the last date for bid submission. The government received 7 bids. But the government disqualified five bidders as they didn’t meet the requests the PIM/EoI set out despite giving the bidders a chance to clarify.

The Centre received two sealed bids on the due date with non-financial bid documents and bid security from the two qualified bidders – M/s Talace Pvt Ltd, and SpiceJet promoter Ajay Singh-led consortium. The government fixed a final reserve price of Rs. 12,906cr after receiving the sealed bids. The Tatas quoted

Rs. 18000cr while Ajay Singh consortium bid Rs. 15100cr. The Tatas won the bid.

The Bid Details

The reserve price was Rs. 12906cr. Tatas quoted 18000cr higher than the reserve price to win the bid. The government will receive Rs. 2700cr in cash while Rs. 15,300 is debt. The Centre will hand over Air India to the Tatas by the year 2021.

The Tatas now have three airlines under their umbrella. The wait begins to see what happens next to the white elephant –Air India. Keep an eye out for our next email in this series. While you peruse this article, consider signing up for the 5 in 5 Wealth Creation Strategy.

Read more:  How Long-term investing helps create life-changing wealth – TOI. 

Electric Vehicles or EVs, as they are commonly called, are vehicles that run on electric power, either partly or fully. EVs are environment-friendly and have low running costs due to lesser moving parts.

As the chants for electrification get louder and louder across the world, it makes sense to examine the topic a bit more closely. We shall see what is the EV situation in India and globally.

Vehicle electrification: A brief history

The concept of EVs is older than International Combustion Engines (ICEs). Scottish inventor Robert Anderson created the first electric carriage in the 1830s. Its battery was not rechargeable and required replacement every time it ran out. However, electric-powered vehicles continued to be in use in the USA and some parts of Europe. New York had a fleet of electric taxis in the 19^th century and battery swapping stations.

With the advent of ICEs, a major roadblock of frequent battery charging/swapping was removed and ICEs gained popularity the world over. Thereafter, there was sporadic research on EVs whenever crude oil flared or geo-political tensions mounted. However, for a large part, ICEs rule the roost.

It was not until the turn of the century that EV development found serious interest from companies and Governments. Companies such as Toyota (Prius), Nissan (LEAF), and Tesla (Model S) took the EV chapter ahead and “glamorized” EVs. Here’s a look at the EV evolution:

Advantage EVs

So why has the world started looking at EVs as the technology of the future? Aren’t we happy driving petrol/diesel-driven vehicles? Following are some reasons:

Reduces climate change 

Effects of fossil fuels such as global warming, mass extinction of species, and growing weather calamities have forced lawmakers across the globe to look at cleaner alternatives

Lowers import bill

Countries such as India don\’t have any significant crude reserves and have to import fossil fuel for their energy requirements. India incurred a crude import bill of $101bn in FY20 requiring to import 82% of its total crude needs. Hence, there is growing interest in technologies that look away from crude oil dependency – electric vehicles being one of them.

Reduces pollution levels

According to WHO, India is home to 14 of the world’s 20 most polluted cities. A major reason for high pollution levels is fuel emissions.

Advancing renewable energy technology
Over the past few years, strong advancements in wind and solar energy have brought down the cost of these forms of energy. This has stirred interest in EVs.

Low maintenance
While an IC vehicle has hundreds of moving parts, an EV has less than 30. This means less wear and tear and a low cost of ownership.

Quieter operation
EVs make much lower noise compared to conventional vehicles since there’s lower friction between moving parts. In fact, EVs are so silent that some OEMs add false sounds to make them safe for pedestrians!

Incentives for buyers
Governments in India (State and Central) are looking at ways to incentivize buyers to go in for EVs. They are offering lower vehicle tax, tax incentives, buyback

India’s EV Policy

The NITI Aayog, India’s policy think-tank, has given several suggestions to the Government of India for EVs. Accordingly, the following policy has been enacted:

• Reduce primary oil consumption in transportation.

• Facilitate customer adoption of electric and clean energy vehicles.

• Encourage cutting-edge technology in India through adoption, adaptation, and research and development.

• Improve transportation used by the common man for personal and goods transportation.

• Reduce pollution in cities.

• Create EV manufacturing capacity that is of global scale and competitiveness.

• Facilitate employment growth in a sun-rise sector

The government adopted the Faster Adoption and Manufacturing of Hybrid and EV (FAME) scheme in 2015, with an allocation of Rs. 895cr, which provided subsidies for e-2Ws, e-3Ws, hybrid and e-cars, and buses.

The FAME II scheme, which came into effect from April 2019, had proposed spending of Rs. 10,000cr. It was to be used for upfront incentives on the purchase of EVs (to the extent of Rs. 8,600cr and for supporting the deployment of charging infrastructure (Rs. 1,000cr).

THE EV Ecosystem

1. Policy: The FAME II policy is India’s first step towards boosting EV penetration in India, though a lot needs to be done. The Government has taken baby steps by introducing e-buses for public transport in some cities. EVs for private use will go up once there are incentives, subsidies, and other such measures.

1. Batteries: Battery cost is nearly 40% of the cost of the vehicle, hence reducing the same is key to increasing EV adoption. Raw materials for battery manufacturing – mainly Lithium and Cobalt – are not available in India, hence raw material dependency will continue (currently India imports crude). Currently, Indian companies only assemble imported battery packs, do not manufacture batteries.

The Lithium-Ion Situation in India

Source: Times of India

1. OEM: Most OEMs are focused on specific sub-segment of the automobile space. 2Ws have seen the most momentum, given that nearly 79% of the Indian auto market (by volumes) comprises of 2Ws. E-3Ws have started by way of e-Rickshaws while e-4Ws are gaining prominence in shared mobility.

1. Grid: There are two major issues that grids have to address

1. Ability to handle peak load
2. Grid composition must be ideally dependent on renewable generation rather than coal-dependent generation.

1. Charging Infrastructure: India will need to simultaneously develop home charging and public charging infrastructure to boost EV adoption.

FAME I added 314 charging stations in India, FAME II 2,867

Source: FADA

1. Customers: EV adoption in India is highest in public transport (buses) and shared mobility. E-2Ws have been the next ones to begin adopt since the cost differential between ICE 2Ws and EV 2Ws is lower than 4Ws.

Lithium-ion price reduction – The biggest enabler

While demand for Lithium is expected to increase with growing EV adoption, prices, surprisingly, have continued to fall continuously. Over the past ten years (2010 – 2020), Lithium prices have dropped 88%. This is due to the following reasons:

• The annual supply of Lithium is expected to grow from 2,15,000 tonnes in 2019 to 7,15,000 tonnes in 2025. This will be led by fresh supplies from Argentina, Australia, and Chile.

• Three new mines will come up in North America in the next couple of years, taking its share in global supply to 5% by 2025.

• New mines and increased production have brought an enormous quantity of material to market, hammering lithium prices.

While lower Lithium prices are music to the ears of Auto OEMs, it is bad news for miners of the metal. Lower prices mean that investments in mining may become less profitable, reducing the pace of new investments. The pandemic reduced demand for EVs, thereby depressing prices further.

However, the freefall in Lithium prices is expected to get arrested by 2022. Several global companies have delayed or postponed expansion plans because of depressed demand currently. Some examples of postponed projects are:

• Chile’s SQM, the world’s second-largest Lithium producer, postponed key expansion at its Atacama salt flat operations from the end of 2020 to late 2021.

• Australian company Wesfarmers delayed its investment decision on the Mount Holland project in Western Australia by a year, to early 2021.

• World leader Albemarle postponed its project to buy 1,25,000 tonnes of processing capacity. It also revised a deal to buy into Australia\’s Mineral Resources Wodgina lithium mine and said it would delay building 75,000 tonnes of processing capacity at Kemerton, also in Australia. (Source: Mining.com)

• China’s Tianqi Lithium Corp., the country’s top producer of the battery metal, also postponed commissioning the first phase of its flagship plant in Kwinana, as it struggles to pay back debt. (Source: Mining.com)

Snapshot of Global EV industry

Country-wise EV sales and penetration

Source: IEA

A look at the future for electric vehicles

Several nations around the world have pledged to convert a majority of their fleet to electric over the next few decades. To date, over 20 countries have announced the full phase-out of internal combustion engine (ICE) car sales over the next 10‑30 years, including emerging economies such as Cabo Verde, Costa Rica, and Sri Lanka. More than 120 countries (accounting for around 85% of the global road vehicle fleet, excluding two/three-wheelers) have announced economy-wide net-zero emissions pledges that aim to reach net zero in the coming few decades.

The way to look at the future of EVs is through two policy targets

• Stated Policies Scenario 

In the Stated Policies Scenario, the global EV stock across all transport modes (excluding two/three-wheelers) expands from over 11 million in 2020 to almost 145 million vehicles by 2030, an annual average growth rate of nearly 30%.

• Sustainable Development Scenario 

In the Sustainable Development Scenario, the global EV stock reaches almost 70 million vehicles in 2025 and 230 million vehicles in 2030 (excluding two/three-wheelers).

The coming years are expected to usher in recent developments for EVs on a global scale. Some key areas of focus could be:

• Cheaper and more efficient batteries with a longer range.

• Greater Government support to reward EV buying vis-à-vis ICEs.

• Safety issues getting addressed (Lithium batteries)

• Penetration of electrification of vehicles to CVs like heavy-duty trucks (where EV penetration is currently the least)

• Favorable investments from companies as profitability goes higher

• Better charging infrastructure involving a combination of home charging and public charging

• Lower TCO for EVs compared to ICEs

• For India, supply chain localization is crucial to bring down the cost of batteries

• Battery disposal/recycling is an issue that will have to be taken care of, given that Lithium is a poisonous element that can affect soil, water, and the environment if disposed of incorrectly.

Given the current scenario of EV adoption, the following is the extent to which vehicles of different countries will get electrified:

Share of EVs to total vehicles by segment 2030 – China

Share of EVs to total vehicles by segment 2030 – Europe

Share of EVs to total vehicles by segment 2030 – India

Share of EVs to total vehicles by segment 2030 – Japan

Share of EVs to total vehicles by segment 2030 – the USA

Share of EVs to total vehicles by segment 2030 – Rest of the World

Source: International Energy Agency

Top EV stocks in India

Maruti Suzuki

Maruti Suzuki the undisputed market leader in the passenger vehicles segment in India is all set to launch its Maruti Suzuki WagonR electric vehicle in the latter half of 2021. The vehicle which is currently in advanced testing stages in actual road conditions may turn out to be a mass-seller with the right pricing strategy as has been the case with most passenger cars launched by the company in the past.

Minda Industries

Minda Industries is a leading manufacturer of automotive components and solutions with a formidable global presence. As many of its product offerings like electronic components, switches, lights, sensors can be used on both EVs and conventional vehicles the company enjoys a huge advantage.

Amar Raja Batteries

Battery is a major component of the electric vehicles. Amara Raja a leading player in the battery segment is currently building a Lithium-ion assembly plant. The company has tied up with several state governements for setting up battery charging stations for EV\’s.

Motherson Sumi

Established in the year 1986, Motherson Sumi Systems Limited (MSSL) is a leading specialized OEM automotive component manufcaturer globally. As most of its product offerings like wiring harnesses, mirrors. moulded plastic interior and exterior parts, bumpers, dashboards and door trims and rubber parts are compatible with EVs the company enjoys a significant advantage.

Tata Motors

Tata Motors has taken a huge lead in the EV segment in India with its Nexon SUV being the largest selling car in the segment since launch. The company has made significant investments to increase its offerings in the EV segment. 

Bottom line

With depleting fossil fuels and rising concerns of pollution caused by conventional vehicles, there is absolutely no doubt that EVs are the future of road transportation. However as in the case of any industry, not all companies in this segment will create wealth for investors. Hence it is important to invest carefully after detailed research. Click here for expert help.

As we saw yesterday, the banking sector is going through revolutionary changes led by privatization initiatives of the Government. Among other changes, privatization will lead to faster technology adoption for banks. And technology is something that will differentiate banks going ahead.

Till recently, physical presence (through branches or agents) was the key for banks to perform their activities. One with the largest physical presence dominated. Customers had to reach out to banks. That was true for an extremely under-banked India prior to two decades. While we are still under-banked, the gap is reducing. Banks are reaching out to customers and are finding new ways to reach out.

In a country as under-banked and geographically vast as India, technology can only be the way forward for enhancing banking presence. Let us take a look at what are the technology trends till now:

• Migration of off-line transactions to online – Several functions such as payments, fund transfers, loan disbursal, and passbook updates are done without stepping into a branch.
• Online KYC – KYC verification is done online by submitting scanned copies of key documents.
• Spoilt for choices – Previously, the choice of a bank was decided by how close by the branch is. With digital banking, proximity is no longer a constraint, especially in urban areas. The choice of a bank is decided by speed, the accuracy of services, and customer relationship management.
• Bank credit growth – The right emphasis on banking penetration, easy money policies by the government and RBI, and readiness of consumers to avail bank credit has led to the growth of the sector. Bank credit to the private sector has grown from just 8% of GDP in 1960 to 50% of GDP in 2020, according to data from World Bank.

• Tie-ups with Fin-Tech – Banks are increasingly tying up with FinTech’s to serve a particular need of their customers. For FinTech’s, it opens up a new avenue for growth by getting access to a ready pool of customers.

For banks, it gives them a new way of serving customers without investing too much into the concerned technology and letting the specialists do the job. Fin-Techs essentially build on top of what banks are already doing. Some banks even buy a stake in some of the start-ups to hasten their growth. Some challenges remain such as tech stack integration, data field matching, API matching, revenue/profit sharing, etc. With faster technology adoption, these wrinkles could get ironed out in the coming years, as both parties realize that collaboration is the way ahead.

• Competitive rates – Technology adoption has helped banks to save operating expenses, allowing them to pass on rates to their customers. Banks have become extremely aggressive in acquiring clients from competitors by luring them with lower (loan) or higher (deposit) rates. Online loan market places such as Bank Bazaar help customers compare loan rates so that they can make the appropriate choice. The same is true of deposits.

• Client Segmentation – Data analytics helps banks to identify and segment clients according to their age, risk profile, credit profile, profession, etc. This helps them to pitch products tailor-made for each category of customers, leading to better conversions. For instance, Google Pay is an India-centric initiative that does not exist in the USA.

These are the existing ways in which banks have used technology to do business in a better way. However, the future holds even bigger and more exciting opportunities for banks.

Some of the ways in which future banking could use technology are as follows. Some of these categories could overlap and we might see a combination of two or more technologies being used:

• Completely Virtual Banks – According to the Bill and Melinda Gates Foundation, by 2030, more than 2 billion people will have digital banking accounts. New age banks that come up could be completely virtual, eliminating the need for physical presence or keeping it to a bare minimum. An example is Atom Bank based in the UK. It is UK’s first bank built for smartphones or tablets, without any branches, and the first digital-only challenger bank to be granted a full UK regulatory license. In 2016, DBS became India’s first mobile-only bank, through DigiBank.

• Data Analytics –Based on data collected from your digital presence, banks could collate your shopping habits, your travel and spending habits and map it with your social media interactions to provide exclusive tailor-made services. Loans and services will be available in real-time without the need for a banking executive.

• Artificial Intelligence – AI can handle a whole set of functions in banking. From robo advisors which can suggest the right financial products tailor-made for you to helping the banking management itself to make decisions. Some popular ways in which AI can be leveraged for making decisions and serving customers are as follows:
  • Predictive analysis can be used for comparing the possible revenue for a bank from opening its branch at allocation “X” vs location “Y”.
  • How to sub-group customers based on certain patterns in their shopping / traveling behavior to launch targeted marketing campaigns
  • The banking interface could be operated through voice commands, as the software can learn the voice of the customer.

Source: CB Insights

• Modification in the way we pay – Few years down the line, cash will no longer be the king, cards could become obsolete and payments could be done through mobile phones, wearables, or even through face recognition. This reduces the hassle of carrying cash or a card, just your mobile phone will be the only required arsenal for your banking and spending needs.

Payment through wearables has already started	Facial recognition could be next ….
Source: Allied Market Research	Source: IdeaQU

• Block-chain technology in banking – If you thought blockchain was only for crypto-currencies, you are mistaken. Blockchain technology offers a secure, fast, and low-cost technology for carrying out transactions. Transactions that took days or weeks can be done in real-time due to the removal of intermediaries.

A consortium of India’s eleven largest banks including ICICI Bank, Kotak Mahindra Bank, HDFC Bank, Yes Bank, Standard Chartered Bank, RBL Bank, South Indian Bank, and Axis Bank have launched the first-ever blockchain-linked loan system in the country.

Some global banks have gone a step forward and introduced their own crypto-currencies – Citibank, Bank of New York Mellon, Goldman Sachs, and JP Morgan Chase.

Source: Tier 3 Silicon Valley

Summing it up,

So it looks like banks are in for a thrilling journey over the next decade or two. Banks of the future could become invisible or less visible, but they would be more intertwined with the lives of their customers than ever before.

Banking will be in the palm of customers’ hands or operable through voice. The currency could become digitized or “crypto-fied”. International money transfer will become easier, cheaper, and instantaneous.

Products will be pitched not just by segmenting customers across categories, but for a given customer. Advisory for products or stocks will be automated through bots and AI and will be personalized.

Traditional banks who get left behind will find it difficult to grow and prosper. No doubt, India still has several years of physical banking ahead of itself. While that will strengthen their presence across the length and breadth of the country, strides in digital banking and technology will help them get more from each customer.

Billionaire and Microsoft co-founder Bill Gates summarized the whole idea very beautifully-

Hope you enjoyed this story on technology and banking and how the two are set to revolutionize banking as we know it.

Over the next two days, we shall take a look at the FinTech industry that is emerging within the Banking and Financial Space. FinTechs are giving banks tough competition in some segments and are partnering with them in others. 

Click here for expert help in creating a multibagger portfolio.

Read more:  How Long-term investing helps create life-changing wealth – TOI.

There is a popular joke on social media “If you owe a bank few thousand rupees in loan it is your problem. But if you owe a bank a few hundred crores it is the bank’s problem.”

Jack Ma, the multi-billionaire poster boy of China’s tech dreams, said the same thing differently in his speech on 24^th October 2020 at a summit attended by elite in China’s power circles “As the Chinese like to say, if you borrow 100,000 yuan from the bank, you are a bit scared; if you borrow a million, both you & the bank are a little nervous; but if you take a loan of 1 billion yuan , you are not scared at all, the bank is,”

Jack Ma’s blunt words cost him USD 35 billion as in the aftermath, the Chinese government pulled the plug on Ma’s Ant Group IPO and he was reportedly missing from the public domain for over two months.

The Alibaba founder has been all over the news lately for multiple reasons.

Ant Group is a Chinese financial services company co-founded by Jack Ma, which offers a one-stop solution for bill payments, financial investment, loans, and other financial services with over 700 million monthly users. The proposed Ant Group IPO in November 2020 was set to be the largest IPO in history, beating even Saudi Aramco’s USD 29.4 billion IPO.

What went wrong for the Ant Group IPO?

A few weeks before the Ant Group IPO, Jack Ma criticized the Chinese-run banking industry in a summit held in Shanghai on 24^th October 2020. In his speech, Jack compared the country’s banking industry to those with a ‘pawn shop mentality\’. With these words, he meant that the government is too risk-averse and slow to innovate.

However, these words did not go too well with the top officials from China’s financial, regulatory and political establishment and set off a chain of events.

A few days later, the government pulled the plug on Jack Ma’s Ant Group’s IPO.

Alibaba Founder, Jack Ma’s rags to riches story

According to Forbes, Jack Ma is one of the wealthiest people in China with a net worth of USD 58.4 billion. But he was not born with a silver spoon in his mouth. He had worked up his way to success and built a colossal empire brick by brick.

Early life, education and career

Born as Ma Yun on 10^th September, 1964 in Hangzhou, one of the most populous cities in China’s Zhejiang, province. His interest in studying the English language at an early age helped him work as a guide for foreign tourists. It is believed that one such foreign penpal nicknamed him Jack considering the difficulty in pronouncing his Chinese name.

After completing his graduation, Jack Ma took up teaching English and international trade at Hangzhou Dianzi University. His dream of studying at Harvard Business School, never materialized as was rejected over ten times.

Despite applying for over 30 different jobs, including KFC and the police service, Jack had to face rejection. At KFC, 23 out of 24 applicants who had applied with him got selected. He was the only one who was rejected.

Early rejections had taught him many important business lessons. In a speech at the University of Nairobi, Jack Ma once said: “You have to get used to failure”.

On a trip to America in 1995, when he searched for the word “beer’ online, Jack saw multiple pages in English and even few in other languages in the search results, but no information related to Chinese websites on the same topic. Jack realised the internet’s potential and saw the dearth of domestic web sites as a great business opportunity. After returning back, he founded one of China’s first internet companies that created Chinese businesses websites.

In 1999, Jack Ma co-founded Alibaba with a team of 18 friends and an initial investment USD 60,000 based on his belief that the B2B internet market had much greater potential for growth than the B2C internet market.

To instil greater confidence in online sales, Alipay was created in 2003. The rapid growth of Alibaba was rapid attracted the attention of the American Internet giant Yahoo which bought a 40 percent stake in the company.

Alibaba went public in 2007 by listing on the Hongkong Stock Exchange and raising USD 1.7 billion. Alibaba’s 2014 IPO on the New York Stock Exchange helped the company raise USD 21.8 billion and gave it a steep market valuation of USD 168 billion, which was unprecedented for any internet company.

In the same year, a holding company called Ant Group was formed to serve as the parent company to Alipay and roll out various financial services, like loans and wealth management.

In September 2018 Jack Ma announced that he would step down as chairman of Alibaba in 2019, though he would remain on the board.

Jack Ma’s fallout with the government

The fallout between the government and Alibaba came out in the limelight soon after Chinese regulators pulled the plug on Ant Group’s IPO days before its launch in November 2020 citing lack of compliance with government regulations including fixing capital shortfalls.

After months of intense speculation about the billionaire’s plight after his absence from limelight, Jack Ma recently resurfaced during an annual event he hosts to recognize rural educators.

In the video of the event circulated online, Jack revealed his intentions about spending more time on philanthropic activities.

China’s closed internet space which is highly regulated and censored gave a unique platform to companies like Jack Ma’s Alibaba and technology platforms like Weibo, WeChat and Baidu to grow and prosper quickly.

The Chinese online payment system, is mainly dominated by two players, Ant and WeChat Pay with over 80% market share.

According to an article published by the Nikkei Asia, in the year 2019, Ant controlled 55% of China’s USD 29.9 trillion volume of online payments, whereas its main comeptitor, Tencent’s WeChat Pay’s share stood at 38.9%.

By using big data and dynamic credit risk management, Ant has managed to keep its loan delinquency rate low at approximately 1-2% which is considered significantly lower than that of financial companies and banks in the country.

Ant Group’s Alipay, manages a giant financial ecosystem which includes investment, lending, and insurance products and caters to vast majority of people in China. Due to its mammoth size, Ant Group’s has become an important entity in the Chinese financial industry. However, being a fintech company it was not subject to the stringent regulatory purview applicable to banks in the country. In a country with government owned or controlled model for large financial institutions, Ant’s exceptional success is unusual. Hence a move to oversee large fintech companies by the country’s regulators was probably in the pipeline from a long time.

On one side, while the regulatory action leading to the Ant Group IPO suspension may be aimed at preventing companies like the Ant from dominating the country’s financial sector, on the other side, it may be a message to reign in Jack Ma.

As they say “Be careful with your words. Once they are said, they can be only forgiven, not forgotten”.

But then for a man who is well known to be outspoken and has built a billion-dollar empire from scratch, does it matter?

Read more:  How Long-term investing helps create life-changing wealth – TOI. 

The maiden issue public issue of Brookfield India Real Estate Trust (REIT), India\’s only institutionally managed public, commercial real estate vehicle backed by Canadian asset manager Brookfield Asset Management Inc will be available for subscription from 3^rd to 5^th of February 2021.

The company intends to use the proceeds of the IPO for repaying its debts and for general corporate purposes.

Price band of the Brookfield India REIT IPO

The price band for the Brookfield India REIT IPO set at Rs. 274 – 275.

Lot size

The minimum lot size is of 200 shares.

Issue size

The issue size for Brookfield India REIT IPO is Rs 3800 crore at the higher price band.

Listing date

Shares of Brookfield India REIT are expected to be listed around 17^th February 2021.

Key opportunities and strengths

Strong backing by sponsor, Brookfield Asset Management a company with global expertise

Brookfield India REIT is an affiliate of Brookfield Asset Management, one of the world\’s largest alternative asset managers and investors, with assets under management of approximately US$550 billion across real estate, infrastructure, renewable power, private equity and credit, and a global presence of over 150,000 operating employees across more than 30 countries. Listed on the NYSE and TSX, Brookfield Asset Management had a market capitalization of over US$50.51billion, as of September 20, 2020.

High-quality real estate assets

Brookfield India Real Estate Trust (REIT) owns four large campus-format office parks strategically located in markets such as Mumbai, Gurugram, Noida and Kolkata with easy access to mass transportation, high barriers to entry for new supply, limited vacancy and robust historical rental growth rates.  Many of the company’s office parks command premium rents and have higher occupancies than the average rents and occupancies of the broader markets they are located within.

Diversified client base

The company has tenants from diverse industries such as technology, financial services, consulting, analytics, and healthcare. Its clients include multi-national corporations such as RBS, Accenture, Tata Consultancy Services, Barclays, Bank of America Continuum and Cognizant.

Placemaking Capabilities

Placemaking refers to a multi-faceted approach to planning, designing, and managing public spaces to create spaces that promote people\’s health, happiness, and well-being.

Due to the size and scale of company’s fully-integrated office parks, the company is well-placed to deliver a unique \”service-based experience\” to its tenants encompassing workspace ecosystem with modern infrastructure and amenities, including day-care facilities, premium F&B outlets, convenience shopping kiosks, shuttle services, multi-cuisine food courts and sports and fitness facilities.

Increasing growth opportunities in India for technology and corporate services

Over the last two decades, India has become the preferred destination for technology and corporate services due to the easy availability of highly skilled and young workforce and a distinct competitive cost advantage. 

According to estimates, over 90 million people are expected to be added to the workforce by 2030, resulting in increased office absorption, creating many opportunities across India\’s commercial real estate market. The global spending on software and Software as a service (SaaS) is expected to grow at a tremendous pace over the next 5 years.

India\’s technology sector in also expected to grow at a CAGR of 13% to US$350 billion by FY  2025 from an estimated US$191 billion in FY 2020 due to the huge pool of skilled and talented workforce, competitive price advantage and the country\’s favourable demographics.

Key challenges to keep in mind before investing in Brookfield India REIT IPO

The Covid-19 pandemic of 2020 has changed the way we live, travel and work like never before. As a result of the associated lockdowns, many businesses were forced to shut their offices temporarily.

Despite the lifting of lockdown, the re-emergence of the Covid-19 pandemic or similar pandemics in the future may affect tenants\’ business and operations, thus affecting their ability to pay rents on time or in full or obtaining new lease commitments due to a general economic slowdown.

Bottom line: Should you invest in the Brookfield India REIT IPO?

Investing in REITs like Brookfield India REIT IPO offers investors an opportunity to earn a portion of the income generated through real estate in the form of dividends or capital appreciation, without the hassles of buying, managing or financing property.

However, pandemics or economic downturns can affect the business of such companies adversely. Two of its peers in the listed space such as Embassy REIT and Mindspace REIT have generated only average returns till date post listing in 2019 and 2020 respectively. Invest wisely after detailed research.

To invest in companies with the potential to multiply your wealth by 4-5 times in 5-6 years, click here.

Read more: About Research and Ranking.

We’ve all heard of millionaires and billionaires, but one term that recently caught our attention was “Teslanaires”. No prizes for guessing that it’s related to Tesla, the mighty EV company. If you have even an iota of interest in cars or technology, then I’m sure you’ve heard of Tesla. Indeed, you’ve also heard of its enigmatic founder Mr. Elon Musk, who routinely creates ripples through tweets, press conferences and media appearances.

Elon Musk – The tech genius who dons many hats

It’s an adage that you have to think “out of the box” to succeed in business. Well then, what do you call someone who thinks “out of the cosmos”, quite literally! You call him Elon Musk. His companies encompass a broad spectrum of technology areas such as space tourism, telecommunications, electric cars, tunnelling, magnetic levitation, AI/machine learning, models for brain-machine interactions, etc. The list is vast and to put it in Lewis Carroll’s words, it gets “Curiouser and Curiouser”. Musk, no doubt, courts controversy at times owing to his fiery nature. But there is no denying that the guy is a genius and has created business cases out of concepts that only existed in science fiction until recently.

A look at the myriad of businesses under Musk’s control

Source: http://www.rapidshift.net/nope-cobalts-not-a-problem-the-ev-revolution-will-march-on

TESLA – A swift multibagger

While all of his companies are compelling business cases, the most famous one is undoubtedly Tesla. According to Wikipedia, \”Tesla, Inc. (formerly Tesla Motors, Inc.) is an American electric vehicle and clean energy company based in Palo Alto, California. Tesla\’s current products include electric cars, battery energy storage from home to grid-scale, solar panels and solar roof tiles, as well as other related products and services.\” The stock of Tesla has been one of the biggest wealth creators in recent times. The stock has returned a staggering 794% over the past year. As of the last count, the stock price rose from $98 a year ago to $880 per share. The stock has created humungous wealth for investors who stuck to its growth story over the years.

Tesla stock returns over different time periods

Source:- Investing.com. Please note 1M, 3M and 6M and 1Yr returns are absolute. 3Yr, 5Yr and 10Yr are CAGR

Simply hype or more: What caused the rise?

Tesla is currently the world’s most valuable car company. As the above graphic shows, its Market Capitalization is higher than that of some of the world’s largest car companies globally. Let us examine some reasons for the stratospheric rise in Tesla’s stock price in CY2020:

• Growing adoption of electric vehicles, solar energy and other cleaner technologies.
• Entry into fast growing compact SUV market (through Model Y) in early 2020. This model was cheaper than earlier SUV models of Tesla.
• Emission credit sales worth $1.2bn in 9MCY2020 (these are directly absorbed as profits) due to its clean energy businesses.
• Greater strides in self-driven car technology over the years, helping it command greater pricing for the technology.
• Slated target of battery cost reduction to the extent of 56% per kWh over the longer term. As per Forbes, batteries constitute 15% of the cost of a Tesla vehicle.
• The company also has plans to produce own batteries and mine lithium on its own, reducing costs further.
• Tesla was included in the S&P 500 index on 21^st December, 2020. This will expose the stock to a much wider ambit of portfolios and funds; increasing liquidity and investor participation.
• In August, 2020 the company went in for five-for-one stock split which boosted investor participation (retail and institutional) as the stock became cheaper to own (on an absolute basis).
• Given the meteoric rise in stock price, there is widespread speculation that there could be one more split in 2021, keeping sentiment buoyant.
• Tesla’s profitability has seen a huge improvement over past four quarters, bolstered by a combination of steady revenue growth and improving profitability.

Patience maketh a Teslanaire

The wealth creation journey of Tesla has been marked by periods of volatility, negative news flows, stock price drop, and many other events that routinely distract investors\’ attention from a company\’s core growth story. However, investors who firmly believed in the growth story and stuck to the stock have been rewarded handsomely. To illustrate, $1,000 invested in Tesla shares in 2010 (when the company got listed) would have become $1,59,000 now! Had you invested the same amount three years ago, you would have made $20,000! As a result of this stellar stock price run, Tesla has created several millionaires out of ordinary people. And these are the Teslanaires that were talking of.

Opportunities such as Tesla are found once in a decade. You need to spot them at a reasonable time, hold on to them and ignore distractions if any. We understand that it is difficult for an ordinary individual to spot such opportunities. And this is where Research and Ranking can step in and make the journey more uncomplicated for you. We might not facilitate investing in Tesla for you, as we are focused only on Indian stocks (at least currently). However, we are continuously looking at spotting the next Balkrishna Industries or the following Page Industries. So come aboard and join us in this wealth creation process!!

Consider this case: You have a new business idea. You share this with your friend. Moreover, he asks, “What is the probability that your new idea will work. Also, if it does, what is the return you will get?”

This question leaves you dumbstruck as you don’t have an answer to your friend’s question.

As a result, we spend too much time in reducing the risks and uncertainty associated with it.

However, there is a big difference between risk and uncertainty, which many people tend to ignore or fail to understand.

In this story, let’s understand the risk and uncertainty and how you can mitigate them (wherever possible) in investing.

Risk 

We take risks knowingly or unknowingly in everyday life. However, what is the risk? A potential of loss or any other negative outcome. Few salient features of risk are:

• You can predict the probability of a future outcome. For e.g. rolling a dice or picking a card. Before we roll a dice or pick a card, we know in advance the odds of each possible outcome.
• Since you can predict them, they can be quantified and managed.

Uncertainty

Uncertainty is the absence of what the outcome can be, forget even evaluating probabilities of an outcome to occur. Few salient features of uncertainty are:

• Unlike risks, where you can manage the probability of risks, it is difficult to predict the outcome here.
• Since they can’t be predicted, they can’t be measured, managed and controlled.

The stock markets are criss-cross of both risks and uncertainty.

Risk involves evaluating the probability of the success of your portfolio based on past performance, fundamentals, growth potential, cash flows, management, business model and many more. On the other hand, uncertainty revolves around global events such as trade wars, natural apocalypses and many others that are difficult to predict. Here, there is complete dark box as the outcome of an event is completely unknown. This means you can’t measure it as you don’t have any information or data on it.

A real instance of risk and uncertainty in investing:

There are two portfolios A and B each consisting of 10 investment ideas. Can you tell which one will perform better in the next 3 years?

You cannot make an accurate guess on the same, but you can analyse the performance of stocks over the last 5 years, their growth potential, management pedigree & other parameters. After doing this analysis, you can attribute the probability of the successful portfolio. For e.g. you may think portfolio A has 75% chance of better performance or portfolio B has only 25% probability of losing the match.

Now let’s again say that there are two portfolios A and B, each consisting of 10 investment ideas. Which one shall deliver better returns?

Let’s say that no investment ideas have been shortlisted for either portfolios. You are clueless as you don’t have any idea on the stocks, their fundamentals, growth or management. Hence, predicting the outcome even though the number of stocks and rule remain the same.

This is uncertainty in investing.

Why Risk (Calculated) & Uncertainty Is Good In Investing? 

Now you’ve understood the difference between risk and uncertainty, let’s look at the problems.

More often, while investing, we act like everything is a risk. The truth is when we act like everything is a risk, we significantly decrease the chance of success and increase the chance of failure. When we start thinking that each factor is unknown, it translates into inaction.

Barry Ritholtz, an American author and equities analyst, CIO of Ritholtz Wealth Management, once quoted: We’ can’t use not knowing as an excuse to not act – because we never know.

Avoiding uncertainty and even overexposing ourselves to uncertainty doesn’t work as both have adverse outcomes.

We all know the famous adage, “No risk, No gain”.

So if an investor wants to create wealth (sustainable one), they have to take calculated risks (where the probability of a negative outcome is low and positive outcome high) and face uncertainty rather than running away.

Uncertainty is a part and parcel of life, even while you walk, drive, start a new job and many more. You never know what may happen next. However, you don’t run from them. Similarly, you never know what uncertainty stock markets may face. So instead of running away, an investor should avoid high risk but embrace calculated risks and uncertainty in the stock market. And, if this still looks difficult, having an expert by your side will increase your chances of success manifold in the stock market.

Read more:  How Long-term investing helps create life-changing wealth – TOI.

The current level of the Nifty is around 11,350 while 5 years back, it was around 6,500 levels. Markets have been appreciating steadily, and irrespective of that, investors think that markets should be blamed.

Look at this: The stock market grew at a CAGR of 13.5% for the last two years. Irrespective of the upward trend in the stock market, an average investor only earns between 1-2% after considering the inflation. Research studies have shown that if you’re an average investor, you’re more likely to lose than gain by investing in the stock market.

What’s more surprising is that irrespective of this upward trajectory in the stock market, I tend to hear these statements a lot while having a conversation with the investors.

“Harsh, the stock market is all gamble. Tell me why I should invest.”

“It is all about luck.”

“Stock market is the best way to lose your money.”

Do you really think the market is the problem? Then why investors fail in the market? And when they fail, why they are fearful of entering the markets again?

We all have moments of darkness in our life, but should it stop us from progressing further in life?

Stock markets are no different. There will be moments of ups and downs but only those who remain patiently invested are highly rewarded. And failures are important to succeed since mistakes make us smarter.

Here are the top 3 reasons why failures are essential to succeed in the stock market…

Failures inspires us to do things in a better way.

Some people take failure personally and give up easily. This encourages stagnation in life.

Thomas Alva Edison is a well-known inventor famous for his optimism. While inventing the light bulb, he tried over a 1000 times and failed when his assistant told him that all their efforts were wasted and it was of no use trying further. Edison replied \”I have not failed. I\’ve just found 1,000 ways that won\’t work\”.

He then went on to do more and more experiments and finally succeeded in inventing the light bulb.

Instead of blaming luck or stock market for loss, one should take steps to do things in a better way. If your investments are not on the same track as your financial goals, it is best to seek professional expertise.

It shows you where to improve

Failure teaches us a very important lesson. It shows where you have to improve.

Different investors follow different styles of investing, which works best for them. If you have been following a particular style of investing, but not getting the desired results it is best to change your strategy.

Failure is an opportunity

Many investors fear market corrections or crashes. Instead of looking at market corrections as a time to exit, you should consider it as an opportunity of a lifetime to create wealth. Because market corrections are the best times to buy quality stocks at good discount prices.

The below table will give you a realistic picture of how the Nifty has behaved post every market correction.

So you can see from the above table, how the growth in Nifty after every correction has delivered a CAGR between 14-28% over the next 3 years.

Same is the story with quality stocks. Despite facing the darkest hours they have not only recovered quickly post correction but also outperformed with time.

So stop worrying about moments of darkness in your investment journey. Invest in star performers.

It is rightly said – \”After every storm if you look hard enough, you will find a rainbow appear.\”

Read more:  How Long-term investing helps create life-changing wealth – TOI.

A few weeks ago, the government announced a Mega Recapitalization Plan of INR 2.1 lac crore for the state-owned PSU Banks.

The plan is split into two parts -INR 1.35 lac crore to be generated via the issue of Recapitalization Bonds and the remaining INR 76,000 crore (which also includes INR 18,000 crore already allocated under the Indradhanush Recapitalization Scheme) via the budgetary support over the next two fiscals.

The capital starved PSU banks have been reeling under the burden of bad loans. This has drastically curbed their ability to reinitiate the flow of credit and push private investment cycle out of its dormancy.

So this announcement came as a big positive surprise for everyone in general and PSU banks in particular.

Many even claimed that the size of the program was equivalent to their estimates of capital requirements for banks for both non-performing asset provisioning and some growth. It is another matter that (in words of CEA Arvind Subramanian), “the amount of stressed assets always and everywhere is at least 10-20 percent more than what it is always and everywhere claimed to be.” So any claims about the adequacy of Recap-Program need to be taken with a pinch of salt.

Then there were many who called this to be an Indian equivalent of the U.S. Treasury’s Troubled Asset Relief Program or TARP, which was created as a response to the 2008 financial crisis.

Irrespective of the view people may have, one thing is clear that this front-loaded commitment brings a much-needed coherence to the resolution process. And for this, the policymakers need to be appreciated.

Before we deep dive let’s first understand the issue at hand in layman terms.

What is this Recapitalization (in simple terms)?

For every loan that a bank gives, it needs to have some percentage as capital. So for example, if this percentage is 10%, the bank then needs to have a capital of Rs. 1000 Cr if it wants to give out loans for Rs 10,000 Cr.

Some loans will obviously go bad. Suppose 4% of the loans, i.e. about Rs. 400 Cr (which is 4% of Rs. 10,000 Cr) go bad. So this loss will hit bank’s capital which will fall to Rs. 600 Cr (Rs. 1000 Cr – Rs. 400 Cr of bad loans) if the loss is realized. This means that bank now has Rs. 600 Cr capital on Rs. 9600 Cr loans – which is around 6.25% and much below the 10% regulator specified limit.

To rectify the situation and improve the ratio, banks need to raise more money, i.e. about Rs 360 Cr to bring capital back to 10% capital ratio (Rs. 960 Cr on Rs. 9600 Cr loans). Or, they need to call back loans worth Rs. 3600 Cr so that existing capital of Rs. 600 Cr is sufficient (as per 10% limit) for the reduced loan base of Rs. 6000 Cr. But calling back loans is of course not possible or practical.

So what happens is that banks stop lending.

And this is exactly what happened with the PSU banks. They stopped lending because they couldn’t lend more as their capital ratios will not allow it any more.

Recapitalization program is trying to solve this. The government gives money as capital to banks so that they can take in some losses and move on with fresh lending.
Let’s get to the actual situation now.

Why is Recapitalization needed now?

It is common knowledge that the quantum of bad loans in the Indian Banking sector is mammoth.

The stressed asset pile is close to INR 10 lac crores. Of this, NPAs account for Rs 7.7 lac crores and the rest are restructured loans. In addition, the banks also need more capital to transition towards the full implementation of Basel 3 norms.

The earlier plan to infuse Rs. 70,000 crore between 2016 and fiscal 2019 was looking increasingly inadequate to meet these capital requirements. To be fair, the government was keen that banks too pitch in and supplement this infusion by raising capital on their own. But due to their toxic books and few other factors (like lack of investor interest), banks found it tough to do anything.

Many felt that these banks should have been left to fend for themselves.

But that was not possible practically. The Indian economy still needs public sector banks as many economic objectives of the government need a strong and unrelenting support of the PSU banks.

Banks themselves switched on their damage control mode and began focusing on their NPAs than on new lending. And while banks started recognizing bulk of these assets as non-performing assets (NPAs), resolution of these assets is not easy and is taking time.

All this, in combination with inadequate credit demand, made for a vicious circle that became unbreachable for many banks.

So what effectively happened was that for several PSU banks, it seemed that they were set on a path of slow death. The government could not afford this -for a variety of reasons. And hence the bank recapitalization plan.

It is expected that this program will allow banks to focus on lending once again and help kick-start growth (which has slowed down since days of high seven percent). Government is also focusing on indirect benefits of such growth, which are more loans to small businesses and consequently, employment generation, etc.

Is it different this time?

Many are of the view that once again, it’s the same old story and things will not change. But let us try to see the bigger picture here.

This is the first time in many years that the government is using a comprehensive strategy to address the issue instead of taking a piecemeal approach.

In a series of development leading to this program announcement, there seems to be an honest intent to address this issue for once and for all.

It began in 2014 when RBI ended the unnecessary permission given to banks to restructure loans indiscriminately. Then in 2015, banks were forced to recognize a bunch of large stressed loans as NPAs, whether or not they were paying interest. Then came the Insolvency and Bankruptcy Code in 2016 that made it easier for creditors to dispossess defaulting promoters and sell the companies or assets to new promoters. Then earlier in 2017, RBI in toe with the government forced the banks to push top 50 defaulters to the NCLT.

And then happened this mega Recapitalization Program.

So it does seem that this time, the overall strategy is better thought out and may provide desired results to some extent. But it is still too early to judge and the problem being addressed is too large to be solved overnight.

But bank recapitalization is not a magic bullet. And things need to be done even beyond this. Ideally, recapitalization and restructuring should go together or atleast not without much lag between the two.

What More is Needed?

One point that is doing rounds is about the moral hazard. That is, what stops these banks from not committing the same mistakes and get into a mess again.

No doubt this is possible.

So even though this recap exercise is a step in the right direction and will help strengthen these banks to some extent, this recapitalization without consolidation and structural reforms is inadequate if not useless. And that is why there is a need to go much beyond this Recap Program.

First of all, not all PSU banks should have access to this program. The government must be selective about which banks get additional capital. Ideally, the banks that have worked harder to deal with their mess should be given priority.

If this means that some of the weaker banks will shrink and eventually become ripe for closure, then so be it. It is not wrong to focus on recapitalizing the strongest 10-15 public sector banks and force the rest to shrink or take their chances with a slow revival.

Unviable banks should be financed only to the extent of their current balances and not for their growth. Of course this will not be easy. But this is what may be necessary now. To implement this, the deposits may be shifted to stronger banks and as far as good assets are concerned, these should be sold off to the stronger banks. The inflow from this asset sale should be used to address bad loans. Eventually, this can result in winding up of weaker banks(hopefully if union issues have been tackled).

Mergers of small weak banks should not happen randomly with larger banks. This will not serve its purpose. There should be a calibrated plan to implement such a strategy. Many are of the view that small banks should go for asset swapping, where smaller banks can sell or swap assets of large companies to larger banks.

We feel that as far as mergers are concerned, they should be encouraged only when the NPA pain is practically addressed and mostly over.

But bigger problems still exist and aren’t addressed by any Recap-Program.

Inefficient and at times politically influenced lending practices, comparatively uncompetitive workforce and slow technology up gradation.

These are the fundamental problems of the PSU banks that have resulted in this mess and still aren’t being addressed correctly.

So even though Recap Program is a lease of life for these banks, the fact is that writing for them is on the wall if these problems are not addressed adequately.

Finally, it is true that at least theoretically, the government had the option of doing nothing about the sorry state of PSU banking space. And with all due respect, it did the right thing by trying to catch the bull by its horn. A large bank recapitalization will pay for itself many times over if things go as per expectations. It might not be easy, but that is still fine given the alternative scenarios that might have played out:

And as ex-RBI governor Raghuram Rajan said:

“I think it’s important to recognize that banks do need capital and you need to put it aside and if it means that there are other resources allocations that should be reduced, so be it. I mean, that’s the cost of staying within the budget. This is not painless.”

But having said that, we reiterate that recapitalization alone is not enough. The government should back this recapitalization program with some real reforms in public sector banks. That is the only way to fully address this problem in the long term.

Read more: About Research and Ranking.