Bernanke Says Easing Won’t Destabilize Emerging Markets

By Craig Torres - Oct 14, 2012

Federal Reserve Chairman Ben S. Bernanke tried to refute arguments the U.S. central bank’s record stimulus is causing destabilizing flows of capital to emerging market economies.
“It is not at all clear that accommodative policies in advanced economies impose net costs on emerging market economies,” Bernanke said today in prepared remarks for a seminar sponsored by the Bank of Japan (8301) and the International Monetary Fund in Tokyo. “Recent research, including studies by the International Monetary Fund, does not support the view that advanced-economy monetary policies are the dominant factor behind emerging market capital flows.”
U.S. central bankers cut the benchmark lending rate to a range of zero to 0.25 percent in December 2008, and last month said that such low levels for the federal funds rate are “likely to be warranted at least through mid-2015.” The Fed initiated a new round of bond buying in September, purchasing $40 billion of mortgage-backed securities per month, and said this third phase of quantitative easing would continue until the outlook for the labor market improves “substantially.”
Bernanke has stepped up accommodation as the central bank failed to meet its dual mandate to achieve maximum employment and stable prices.
The personal consumption expenditures price index rose 1.5 percent for the 12 months ending August following a 1.3 percent gain in July. That’s below the 2 percent target set by the Federal Open Market Committee in January. Also, the 7.8 percent unemployment rate in September exceeded Fed officials’ longer- run full employment estimate of 5.2 percent to 6 percent.

Growth Pace

Bernanke said the pace of growth has been “insufficient to support significant improvement in the job market.”
Still, by announcing open-ended purchases in September and by making them contingent on improvement in labor conditions, the public should have greater confidence “the Federal Reserve will take the actions necessary to foster a stronger economic recovery in a context of price stability,” he said. He also said the open-ended purchases provide the FOMC “with flexibility in responding to economic developments.”
“An easing in financial conditions and greater public confidence should help promote more rapid economic growth and faster job gains over coming quarters,” Bernanke said.
A Fed dollar index weighted for trade against a group of trading partners has fallen 4.8 percent since the end of August 2007, the month the financial crisis began.

Whatever Necessary

Brazilian Finance Minister Guido Mantega vowed in a statement delivered last week at the IMF’s annual meeting in Tokyo to do whatever is necessary to stop the “selfish” monetary policies of some developed nations from hurting his country’s economy.
“I have been arguing that ‘currency wars’ will only compound the world’s economic difficulties,” Mantega said. “Trying to grasp a larger shares of global demand through artificial means has many side effects. It is a selfish policy that weakens the efforts for concerted action.”
Brazil reduced its benchmark rate to a record-low 7.25 percent this month, has imposed barriers on capital inflows and purchased dollars in the spot and futures markets to weaken the real and help manufacturers. The real has declined about 9 percent in 2012, the biggest drop among the dollar’s 16 most- traded counterparts.
Philippine central bank Governor Amando Tetangco said in an interview in Tokyo last week that he is “watchful” of the challenges to monetary policy in emerging markets presented by the Fed’s actions.

Expected Returns

Bernanke said differences in expected returns are the most important determinant of capital flows, and the rebound in emerging markets from the global financial crisis “provided still greater encouragement to these flows.
‘‘Any costs for emerging market economies of monetary easing in advanced economies should be set against the very real benefits of those policies,’’ the Fed chairman said.
Slowing growth in emerging market economies this year in part results from decelerating exports to the U.S., Europe and other advanced economies, he said.
‘‘Monetary easing that supports the recovery in the advanced economies should stimulate trade and boost growth in emerging market economies as well,’’ Bernanke said. ‘‘Assessments of the international impact of U.S. monetary policies should give appropriate weight to their beneficial effects on global growth and stability.’’
To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net;
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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Chidambaram Says India Needs Lower Rates as Policy Is Revamped By Aika Nanao, Shamim Adam and Unni Krishnan - Oct 12, 2012

India’s finance minister said the nation needs lower interest rates to bolster economic growth and sought a stronger exchange rate as he prepares to deepen the government’s economic-reform agenda.
“Interest rates must come down and if the fiscal policy steps that we are taking encourage the central bank to take monetary policy action which will result in lower interest rates, I think that will be good,” Palaniappan Chidambaram, 67, said in an interview with Bloomberg Television in Tokyo yesterday.
India has revamped economic policy since Chidambaram became finance minister on July 31, opening up to more investment from abroad and raising subsidized diesel prices to tackle a budget deficit. The push snapped months of gridlock over how to revive the economy, helping the rupee rebound from a record low. Chidambaram said he plans further changes in capital markets, insurance, banking and infrastructure in the next few weeks.
“I think the rupee must appreciate a little more,” he said. “It has appreciated about 5 or 6 percent in the last few weeks, but I think the rupee must find a reasonable level, its true level.”
The rupee has surged more than 5 percent against the dollar in the past three months, the most among major Asian currencies, buoyed by the biggest opening of the economy to overseas companies in a decade.

Price Pressures

Consumer-price inflation slowed to a six-month low of 9.73 percent in September, a report showed yesterday, while remaining the fastest in a basket of 17 Asia-Pacific economies tracked by Bloomberg, and almost twice as high as the Reserve Bank of India’s comfort level of about 5 percent.
Inflation hasn’t been tamed yet and supply constraints are adding to price pressures, Chidambaram said. A further rise in the rupee will help to curb the increase in costs, he said. The central bank can’t be expected to bear the burden of containing inflation by itself, he said.
“When fiscal policy and monetary policy act in tandem and supply improves and the rupee appreciates a little more, I think we will be able to tame inflation,” he said.
Governor Duvvuri Subbarao left the benchmark repurchase rate unchanged at 8 percent for a third meeting in September, after cutting it from 8.5 percent in April.
The Reserve Bank has signaled that curbing the fiscal deficit may boost scope to join emerging nations from South Korea to Brazil in extending rate reductions this year.

‘Crucial Link’

“The crucial link as the finance minister mentioned is that inflation should come down and that is not happening,” said Prasanna Ananthasubramanian, an economist at ICICI Securities Primary Dealership Ltd. in Mumbai. “They will not touch the repo rate but will ensure comfortable liquidity so that banks have an incentive to expand credit.”
Prime Minister Manmohan Singh’s government announced the first increase in diesel prices in more than a year on Sept. 13, after Chidambaram pledged to contain a fiscal shortfall that has put the nation’s investment-grade credit rating in jeopardy.
The administration opened industries including retail and aviation to more foreign investment the next day, and this month decided to seek parliamentary approval for more overseas participation in the insurance and pension businesses.
The burst of changes, which snapped months of political gridlock over how to rejuvenate the economy, cost the ruling Congress-party led coalition its majority in both houses of parliament after a key ally withdrew support.

Budget Outlook

Singh is gambling that the long-delayed opening measures will revive economic growth in time to salvage Congress’s fortunes before a general election due by May 2014.
Chidambaram said he’s “absolutely certain” that India’s credit-rating won’t be downgraded, and added the budget for the year through March 2014 would be neither populist nor austere.
“We must have a budget that emphasizes fiscal consolidation and incentivizes savings, promotes investment and cuts out wasteful expenditure,” he said, adding key social welfare programs will be fully protected.
India’s budget deficit is the widest among major emerging nations as slower growth hurts tax receipts and subsidies fan spending, imperiling the government’s goal of narrowing the gap to 5.1 percent of gross domestic product in the 12 months through March 2013, from 5.8 percent the previous fiscal year.
Indian economic growth may weaken to a decade-low of 4.9 percent in 2012 after investment stalled, the International Monetary Fund said this week. The outlook for Asia’s third- largest economy is unusually uncertain, it said.
To contact the reporter on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net; Shamim Adam in Singapore at sadam2@bloomberg.net; Aika Nanao in Tokyo at ananao@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

Superbugs Epidemic to Spur Teva Supplier Growth in India By Adi Narayan - Oct 11, 2012

Cocktails of antibiotics aimed at thwarting lethal superbugs may help Venus Remedies Ltd. (VNR) expand at the fastest pace in three years as the Indian drugmaker taps demand from doctors for more bacteria-fighting options.
Venus, which supplies medicines to the world’s largest generic drugmaker, Teva Pharmaceutical Industries Ltd. (TEVA), forecasts sales will expand 15 percent for the next two years, driven largely by its treatment for drug-resistant infections of the urinary tract and respiratory system, Chairman Pawan Chaudhary said in an interview.
Sales of fused antibiotics expanded at four times the pace of single-ingredient substitutes in the past two years as physicians in India increasingly relied on cocktails to treat patients with multi-drug resistant infections. Mutant germs producing an antibiotic-destroying enzyme called ESBL first showed up in 1983 and are now responsible for 40 to 80 percent of hospital-acquired infections, according to several studies.
“Resistance has already become a very big problem and in the next five years it’s going to be an epidemic,” Chaudhary said from his office near Chandigarh in northern India. “We want to give doctors an option, they don’t have to rely on the strongest antibiotic to deal with ESBLs.”
Sales growth at Venus, set up in 1989, has slowed for six straight years because of declining prices of medicines sold to governments. The company’s shares, which have risen 83 percent this year, fell 0.4 percent to 279.95 rupees in Mumbai yesterday.

Bacterial Enzyme

It’s become a common practice for drugmakers to introduce a variety of cocktails as there are almost no new antibiotics coming in, Siddhant Khandekar, an analyst at ICICI Direct, said in an interview. Sales of combination drugs containing three of the most commonly used antibiotics have grown 52 percent in the last two years, according to data from IMS Health Inc.
Competition is also intensifying in the market that’s led by the Indian unit of GlaxoSmithKline Plc. (GSK)
Augmentin, the best-selling brand in the country, is one such combination of the antibiotic amoxycillin and clavulinic acid, which blocks the activity of a defensive bacterial enzyme. Glaxo is the leader with a 27 percent market share and there are 293 other registered brands for the same product, according to the All India Organization of Chemists and Druggists.
Venus, which also makes injectable medicines to treat pneumonia and meningitis, plans incremental changes and additions to improve the efficacy of existing drugs in ways that can be patented to beat the competition, Chaudhary said.

Sulbactomax Brand

The company’s flagship product contains three ingredients: the antibiotic ceftriaxone, a chemical that aids the drug’s activity by attacking a defensive enzyme produced by the bacteria, and a compound called EDTA. The compounds have been in use for about three decades and Venus’ patents pertain to the specific concentration of the three.
The product is sold under the Sulbactomax brand in seven countries, including Ukraine and Syria, and will be introduced in India next year, Chaudhary said.
In a drug cocktail, three or four ingredients are combined in a single pill or injectable vial. The widespread use of such treatments can also lead to resistance, according to Pankaj Vohra, a pediatric gastroenterologist in New Delhi’s Max Hospital.
Bacteria evolve the ability to thwart a drug when it’s used repeatedly and this characteristic can be carried in the genes and passed on to other bacteria.

Alarming Spread

In 2008, researchers studying the case of a diabetic stroke patient of Indian origin found that bacteria cultured from his urine and feces evaded more than a dozen drugs, including last- resort medicines called carbapenems.
The bacteria carried a gene, later named New Delhi metallo- beta-lactamase-1 or NDM-1, that scientists warn is spreading faster, further and in more alarming ways than any they’ve encountered.
Venus is carrying out laboratory-based tests to verify whether Sulbactomax can work against NDM-1 and will publish the results soon, Manu Chaudhary, head of research, said in an interview.
It’s unlikely that the drug would work on NDM-1, said David Livermore, who formerly headed antibiotic resistance monitoring at the U.K.’s Health Protection Agency in London.
The company, which gets about 4 percent of its revenue from selling to Israel’s Teva (TEVA), has obtained a patent for Sulbactomax in 40 countries and plans to start sales in 20 nations by 2014.
Demand to treat superbugs such as ESBL has helped sell Sulbactomax, which accounts for about 10 percent of Venus’ sales, Chairman Chaudhary said. The company is looking for partners to expand in Africa and South America, he said.
“There is demand because more than anything else, it is giving better results,” Chaudhary said. “This is our fastest growing drug.”
To contact the reporter on this story: Adi Narayan in Mumbai at anarayan8@bloomberg.net
To contact the editor responsible for this story: Jason Gale at j.gale@bloomberg.net

Noda Calls for China Talks as Island Spat Threatens Growth By Matthew Winkler, Isabel Reynolds and Takashi Hirokawa - Oct 10, 2012

Japanese Prime Minister Yoshihiko Noda called for talks to contain economic damage from a diplomatic dispute with China as Japan’s largest trading partner downgraded its delegation to an annual gathering in Tokyo.
“These are the second and third largest economies in the world and our interdependence is deepening,” Noda, 55, said yesterday in an interview at his office in Tokyo. “If our ties cool, particularly economic ones, then it isn’t a question of one or the other country suffering. Both countries lose out.”
Noda’s call reflects rising concern that tensions over Japan’s nationalization last month of islands claimed by both nations will hurt trade. The International Monetary Fund, holding its annual meetings in Tokyo this week, said an escalation in strains may affect world growth. China’s central bank governor and finance minister are skipping the gathering.
China’s backlash against the move saw Toyota Motor Corp. (7203) and Nissan Motor Co. suffer their biggest month drop in Chinese car sales since at least 2008 in September. JPMorgan Chase & Co. sees a 0.8 percentage-point hit to Japan’s gross domestic product from the China dispute this quarter.
“We need talks through various channels to make sure there is no effect on the broader relationship,” Noda said. “There has been an effect on individual industries. The overall effect will depend on the talks we have going forward and the efforts we make.”

Stock Decline

The conflict contributed to a drop in Japanese stocks in the past month, with the Nikkei 225 Stock Average (NKY) down 3.1 percent since Sept. 10, when Noda’s administration announced the deal to buy the islands, known as Senkaku in Japanese and Diaoyu in Chinese. The spat has added to economic strains from Europe’s crisis and a fading in reconstruction spending from last year’s earthquake and tsunami disaster.
“This is the last thing Japan needs right now, given the overseas slowdown and the sluggish economy,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo and a former central bank official. “The dispute has become much more serious than we initially expected.”
At stake for China are ties with its second-largest provider of foreign direct investment. Japanese companies poured in $5.1 billion in the first eight months of 2012, second only to Hong Kong, according to the Chinese Ministry of Commerce.
“If the territorial dispute escalates further, it could become a risk for both Japan and China’s economies, and eventually for the global economy,” Naoyuki Shinohara, an IMF deputy managing director, said in an interview in Tokyo Oct. 9.

Ownership Claim

Japan’s prime minister said his government won’t compromise on its ownership claim, reiterating comments he made last month in New York. China denounced the position as “outrageous,” and has increased the dispatching of patrol boats into the waters claimed by Japan.
“There is no doubt that the Senkaku islands are Japan’s inherent territory in terms of history and international law,” Noda said. “There is no problem of sovereignty.”
China maintains that it’s owned the East China Sea islands for centuries. Japan argues it took control of them in 1895, lost authority after World War II, and had them returned by the U.S. in 1972. Fishing and energy rights are at stake in the conflict, and the two countries have failed to implement a June 2008 deal to develop a natural gas field in the area.

Energy Consumer

The East China Sea may hold as much as 160 billion barrels of oil, according to Chinese studies cited by the U.S. Energy Information Agency. China is the world’s largest energy consumer and its onshore oil fields cannot keep pace with near double- digit economic growth. Control over the disputed area would help it avoid the energy model of Japan, which imports almost 100 percent of its petroleum.
Political transitions in both countries may prolong the worst bilateral crisis since at least 2005. Chinese President Hu Jintao is poised to hand power to the next generation of China’s leaders, and Noda faces elections as soon as this year.
Turning to exchange rates, Noda said his government will act against any disorderly gains for the yen, and urged policy makers around the world to follow through on pledges to rebalance global demand. The Japanese currency is about 4 percent from a postwar high against the dollar, which undercuts exporters like Sony Corp. and forced Japan a year go to conduct record foreign exchange intervention.
“We have to observe the market closely to see whether there are excessive or disorderly moves” in the currency market, he said. The yen’s strength is a “serious problem,” is out of step with Japan’s economic performance and “when necessary, we will take decisive action,” he said.

Record Intervention

Japanese authorities have refrained from intervening in the currency market this year after selling at least 14.3 trillion yen ($182.6 billion) in 2011. Officials spent a one-day record 8.07 trillion yen Oct. 31 to bring the currency down from a postwar high of 75.35 yen.
The currency traded at 78.11 dollar at 10:00 a.m. in Tokyo, from 78.18 late yesterday in New York.
Noda has been unable to reverse more than a decade of deflation and his biggest legislative achievement was a sales tax increase that risks damping consumption.
He is Japan’s sixth prime minister since 2006, and the third for the Democratic Party of Japan since it defeated the Liberal Democratic Party in 2009 after the LDP’s half-century domination of government. Japan has failed since then to foster a durable two-party system and political squabbling following the March 2011 earthquake and Fukushima nuclear disaster that killed more than 18,000 people has left both major parties with less than 50 percent combined support.

Leadership Turnover

Asked about the rapid leadership turnover, Noda cited the lack of a fixed term for prime minister and a split parliament that impedes progress.
“For the international community, if we have a different prime minister attending every summit there is no sense of stability,” he said. “We have to do something about that.”
Noda’s approval rating was 34 percent in a Yomiuri newspaper poll published Oct. 3, compared with 65 percent when he took office 13 months ago. Support for his DPJ was at 18 percent, while that of the LDP was 28 percent. Almost 45 percent had no party preference.
Noda spoke on the eve of a gathering of the Group of Seven in Tokyo, where finance chiefs and central bank governors will assess the recovery from the 2009 global recession.
The gathering follows efforts by Europe to address its debt crisis with the establishment of the 500-billion euro ($644 billion) European Stability Mechanism. Japan has supported Europe through the purchase of rescue-fund bonds and increased contributions to the IMF.
“Japan is the largest creditor country in the world, so we have made contributions to the stability of international markets and we want this IMF meeting to confirm that we will continue to contribute,” Noda said.
The prime minister also urged the Bank of Japan to take “decisive” action at the right time to end deflation that’s eroded wages and growth.
To contact the reporters on this story: Matt Winkler in Tokyo at mwinkler@bloomberg.net; Isabel Reynolds in Tokyo at ireynolds1@bloomberg.net; Takashi Hirokawa in Tokyo at thirokawa@bloomberg.net
To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

‘Titanic’ Defaults Loom on Restructured India Bank Debt

By George Smith Alexander and Anto Antony - Oct 10, 2012

India’s Kingfisher Airlines Ltd. (KAIR) escaped collapse in 2010 by restructuring 77.2 billion rupees ($1.4 billion) of debt it had run up buying airlines and adding routes amid the nation’s economic boom.
Less than two years later, the carrier controlled by billionaire Vijay Mallya was back in talks with creditors, while its net debt had increased by 9 billion rupees. The airline this month grounded its entire fleet after pilots went on strike to demand seven months of unpaid salaries, and was given time until the end of October by its creditors to submit a funding plan.
Kingfisher is among Indian companies resorting to an out- of-court loan-restructuring process that bankers and regulators say is too lenient on borrowers, leading to restructured debt that has more than doubled since March 2009. A fifth of the credit may sour as the economy falters and crimp profits at government-controlled lenders such as State Bank of India that account for three-quarters of the nation’s loans and deposits.
“No single lender can afford a large company going under, a la Titanic,” A.S.V. Krishnan, senior research analyst at Ambit Capital Pvt. in Mumbai, said in an interview last week. “Lenders have overdone restructuring, and it is coming to roost now on their balance sheets.”
Concern that the rise in restructured loans -- which give borrowers a moratorium on payments, longer maturities or lower interest rates -- will lead to deterioration in asset quality is weighing on the shares of state-run lenders this year, including Bank of India and Punjab National Bank. (PNB) The six worst performers in 2012 on the Bankex Index (BANKEX), which tracks stocks of 14 Indian lenders, are controlled by the government.

Stressed Assets

The volume of loans that will be restructured may jump 71 percent in the year ending March 2013 to 2.05 trillion rupees from 1.2 trillion rupees a year earlier, according to estimates by Crisil Ltd., the Indian unit of Standard & Poor’s. That would mean 5.7 percent of India’s total bank loans will have been restructured over the two-year period.
Even with easier terms, borrowers have failed to make payments on 15 percent of these loans since 2009, a panel constituted by the Reserve Bank of India (BOI) wrote in a July 20 report. The existing guidelines allow banks to restructure loans for debtors who don’t have viable plans to bolster cash flow, according to the report, delaying the inevitable collapse.
Companies may go on to default on as much as 500 billion rupees of restructured loans, Pawan Agrawal, a senior director at Crisil, estimated on Aug. 30.
The increase in the volume of restructured debt means that stressed assets, including restructured debt and gross nonperforming loans, may climb to a 12-year high of 11 percent of total loans for Indian banks in the year ending in March, Suresh Ganapathy and Parag Jariwala, analysts at Macquarie Group Ltd. in Mumbai, wrote in an Aug. 30 report.

‘Inevitable Downgrade’

India’s government-controlled lenders, led by Mumbai-based State Bank of India, the nation’s largest, and New Delhi-based Punjab National Bank, have the most at stake. The restructured debt probably would account for an average 8.5 percent of state- run lenders’ loans by the end of March, Macquarie estimated, based on Crisil’s forecast.
The restructured debt accounted for 5.92 percent of outstanding standard loans at state-controlled lenders as of the end of March, according to an Aug. 23 central bank report. The ratio was 1.08 percent on average for the biggest private-sector banks, including ICICI Bank Ltd. (ICICIBC) and HDFC Bank Ltd., and 0.14 percent for foreign lenders operating in India, the data show.
“Lenders are deferring the inevitable downgrade of many unviable accounts by restructuring,” Nitin Kumar, a Mumbai- based analyst at Quant Broking Ltd., said in a phone interview. “If the economic scenario worsens, a large portion of the restructured loans will turn bad.”

Credit Costs

Restructuring increases credit costs for lenders, which are required to set aside 2 percent of the value as provisions, compared with 0.4 percent for the original loan. New rules under consideration by the central bank would increase that to 5 percent, which may cut pretax earnings for state-run lenders by as much as 10 percent, according to estimates by Mumbai-based Edelweiss Financial Services Ltd.
More borrowers may default on restructured debt as the economy slows and companies struggle to raise funds amid the rout in capital markets and tightened credit from lenders. The slippage may climb to 20 percent because of the “aggressive restructuring” by state-run lenders and the faltering economy, Espirito Santo Securities wrote in an Aug. 30 note to clients.

Stalled Growth

The central bank on July 31 cut its forecast for expansion of India’s $1.8 trillion economy to 6.5 percent for the 12 months that began April 1. That would match last year’s pace, which was the slowest in nine years.
A squeeze on short-term financing has already exacerbated the pressure on power utilities run by regional governments. Last month, India’s cabinet intervened to rescue the largest electricity buyers, allowing them to raise rates and unveiling steps to reorganize their $30 billion of debt.
The slowdown also has led companies including GTL Ltd. (GTS), Hotel Leelaventure Ltd. (LELA), Hindustan Construction Co. (HCC), 3I Infotech Ltd., KS Oils Ltd. and Jindal Stainless Ltd. to tap India’s voluntary debt-restructuring system.
The system, set up for large and mid-size companies in 2001 with guidelines issued by the central bank, allows borrowers to seek a moratorium on repayments, obtain new loans with extended maturities or lower interest rates, or swap debt for equity to avoid defaults.

Voluntary Program

The approval process for restructuring debt is set in motion by creditors who account for at least 20 percent of the loans. Each package can be implemented only after it wins the backing of lenders accounting for 75 percent of the debt, according to the Corporate Debt Restructuring Mechanism website. The process is overseen by a group of bankers, including the heads of State Bank of India (SBIN), ICICI and Punjab National Bank.
The list of companies awaiting better terms for their loans at CDR Cell, the unit responsible for debt restructuring, is “a better indicator of the health of corporate India” than the banks’ reported bad-debt ratios, Hemindra Hazari and Manuj Oberoi, analysts at Nirmal Bang Group in Mumbai, wrote in an Aug. 21 note to clients.
CDR Cell received 433 requests for restructuring 2.27 trillion rupees in loans as of June 30, according to its website. That’s more than double the 958.2 billion rupees reported as of March 31, 2009. About 371.7 billion rupees in debt is in the final stages of being approved for restructuring, the data show.

‘Extraordinary Rise’

“We are seeing an extraordinary rise in the number and volume of loans being restructured,” Reserve Bank of India Deputy Governor K.C. Chakrabarty said in Mumbai Aug. 11. “It appears that the provisions of the corporate debt-restructuring mechanism have not been used very ethically and judiciously.”
Among the largest such transactions is a restructuring arranged by Mumbai-based Global Group, a provider of telecommunications infrastructure and network services.
The closely held company in December negotiated with a group of 25 lenders for 162 billion rupees owed by its GTL Ltd., GTL Infrastructure Ltd. (GTLI) and Chennai Networks Infrastructure Ltd. companies. Under the agreement, creditors would give up interest payments of 24 billion rupees. That was matched by the amount put up as a personal guarantee by Global’s controlling shareholder. Ramakrishna Bellam, a spokesman for Global Group, declined to comment on the restructuring.

Pending Restructuring

At State Bank of India, the volume of loans that deteriorated into bad debts during the first quarter climbed to a record 108.4 billion rupees, according to Mumbai-based Motilal Oswal Financial Services Ltd., more than double the previous three months’ 43.8 billion rupees. The gross nonperforming-loan ratio widened to 4.99 percent.
“We can only hope that the pain is behind us as far as asset quality is concerned,” State Bank of India Chief Financial Officer Diwakar Gupta said Sept. 24.
While the bank restructured about 5.6 billion rupees in loans during the three months ended June 30, matching the year- earlier level, almost 32 billion rupees in loans are awaiting approval at CDR Cell, Gupta said. About 20 percent of the bank’s renegotiated loans had soured by the end of June, he said.
Still, State Bank is in better shape than its smaller government-controlled rivals, according to analysts at Macquarie and Espirito Santo.
Oriental Bank of Commerce, based in New Delhi, has restructured as much as 8.3 percent of its total domestic assets since March 2010, compared with State Bank’s 1.7 percent, according to Saikiran Pulavarthi and Sri Karthik Velamakanni, analysts at Espirito Santo. At Mumbai-based Bank of India and Punjab National Bank, it was 6.7 percent, they wrote in an Aug. 30 note to clients.
Calls and e-mails to Oriental Bank Chairman and Managing Director S.L. Bansal, Bank of India CFO Gauri Shankar and Punjab National Bank Chairman K.R. Kamath weren’t returned.

Tightening Safeguards

The surge in restructured debt was triggered by one-time measures meant to help corporate borrowers and banks in the aftermath of the 2008 global financial crisis, according to the July 20 Reserve Bank of India report.
So-called restructured standard assets -- loans that have been renegotiated and on which borrowers are making scheduled payments -- climbed 77 percent over two years to 1.07 trillion rupees as of March 2011, surpassing gross bad loans of 940.9 billion rupees, the central bank panel reported. It didn’t provide more recent numbers.
“The data seems to suggest that restructuring on accounts is being resorted to, to avoid classification of accounts as nonperforming assets,” Chakrabarty told reporters.

Debt Limits

The panel recommended changes that aim to tighten safeguards against defaults for creditors while curtailing the “excessive risk-taking” and “lax business practices” by borrowers, according to the report.
In addition to increasing the provisions that banks must set aside for restructured loans to 5 percent from the current 2 percent, the panel also recommended introducing an unspecified limit on the amount of debt that can be swapped for equity at publicly held companies.
The debtor companies’ controlling shareholders, known in India as promoters, also should be required to contribute a minimum 15 percent of the reduction in value of the loans or two percent of the restructured debt, they said.
“The proposal is timely, as banks may end up restructuring more loans” in the two years ending March 2013 than they had in the previous 10 years, Ananda Bhoumik, senior director for financial institutions at Fitch Ratings India Pvt. and a member of the central bank panel, wrote in a July 25 note.

‘Slightly Excessive’

The recommendations face some criticism from bankers such as State Bank of India Chairman Pratip Chaudhuri, who described them as “slightly excessive” in an interview in Mumbai on Sept. 24. The central bank will determine the new guidelines after an analysis of comments from stakeholders, central bank Deputy Governor Anand Sinha said Sept. 6. The feedback period for the proposals ended on Aug. 21.
Proponents of tighter rules argue that investors and lenders would benefit from more transparency in asset quality.
“Treating restructured loans as nonperforming would help report the real credit cost of Indian banks and encourage them to price the risk into these loans more accurately,” Fitch’s Bhoumik wrote in the note.

Reduced Profit

The proposed increase in provisions may reduce pretax profit for state-run banks by as much as 10 percent, according to estimates from Nilesh Parikh, Kunal Shah and Suruchi Chaudhary, analysts at Edelweiss Securities in Mumbai. The worst-hit probably will be Indian Overseas Bank (IOB), Oriental Bank of Commerce (OBC), Union Bank of India and Punjab National Bank, while the impact for private-sector banks may be less than 1 percent, they wrote on July 20.
Indian Overseas Bank Chairman M. Narendra and Union Bank of India spokesman S. Aftab also didn’t return calls and e-mails seeking comment.
The current loan-restructuring process for large and mid- size companies arose from the Indian court system’s failure to handle company bankruptcies.
“The CDR Cell is the nearest approximation that India has to the Chapter 11 bankruptcy framework available in the U.S.,” State Bank’s Chaudhuri said in an interview in Mumbai on June 27. “Though the scenario isn’t ideal, we don’t have a choice but to work within the legal framework available to us.”
The differences between the two systems are significant for controlling shareholders. While a bankruptcy would wipe out equity owners’ investments, under India’s voluntary debt- restructuring program, they enjoy better protection.

‘Perverse Incentives’

If creditors are forced to write down debt by $100 million, the borrower’s controlling shareholder would be called upon to inject only $15 million of new equity capital. The contribution by the promoter can be made in the form of interest-free loans to the company or conversion of unsecured debt into stock, according to the central bank.
The current system creates “perverse incentives” by not inflicting enough economic pain on corporate owners, said Anish Tawakley, a Mumbai-based banking analyst at Barclays Plc.
Kotak Mahindra Bank Ltd. (KMB), the only publicly traded Indian lender that hasn’t joined CDR Cell, said that the decision to stay out has helped to keep soured loans in check.
“We believe that if the loans go bad it is always better to accept them as a nonperforming loan and start working on recovering it,” Kotak Mahindra CFO Jaimin Bhatt said in an interview on July 19.
The lender, controlled by billionaire Uday Kotak, reported that 0.64 percent of its total loans had soured as of June 30, widening from 0.41 percent a year earlier.

Moral Hazard

Yes Bank Ltd. (YES), based in Mumbai, also has considered exiting CDR Cell, Chief Executive Officer Rana Kapoor said.
The central bank’s proposed changes are a “very good” development as they require owners to take a bigger hit, thereby ensuring a “serious commitment,” Kapoor said in a July 25 interview. The number of cases referred to CDR Cell probably will decrease after the new rules are in place, he said.
If banks use the corporate debt-restructuring mechanism to defer bad loans, it defeats the purpose of the system, Kapoor said in an interview.
The banks’ willingness to restructure loans without imposing substantial losses on shareholders “may be creating a moral hazard,” Tawakley of Barclays said in a phone interview.
“People know that you can take a risk and you won’t have to bear the costs of those risks as it will be borne by the banks,” Tawakley said.

Kingfisher Losses

Kingfisher’s Mallya, 56, founded the Bangalore-based company in 2005, naming it after his UB Group’s flagship beer brand. He then took on debt and switched strategies even as the carrier’s losses mounted. In 2008, the company completed a merger with Deccan Aviation Ltd., operator of India’s first low- cost airline.
Mallya said in a September 2011 letter to shareholders that banks had converted 30 percent of their outstanding loans into preferential and equity capital. Lenders were allotted 116 million shares at a price of 64.48 rupees a share on March 31, 2011, while the shares closed in Mumbai at 39.8 rupees apiece. The stock ended last week at 13.25 rupees.
In that round of debt restructuring, lenders had reduced Kingfisher’s interest rate by three percentage points to 11 percent, according to the firm’s annual report for that year.

Tougher Stance

Kingfisher’s financial woes continued even after the debt restructuring. In November, the carrier asked for another round of reductions in loan rates and an increase in credit limits to help meet operating costs and pay for fuel.
Kingfisher CEO Sanjay Aggarwal and spokesman Prakash Mirpuri didn’t return e-mails seeking comment. Mallya and UB Group’s CFO Ravi Nedungadi also didn’t reply to e-mails or return calls to their mobile phones.
The carrier had pledged its brand, a luxury villa in Goa, two helicopters, a Mumbai building and shares as collateral for bank loans of as much as 64.2 billion rupees as of Nov. 30, Junior Finance Minister Namo Narain Meena told lawmakers on Dec. 9. The total value of the collateral, including furniture and fixtures, was 52.4 billion rupees, he said.
This time, bankers are taking a tougher stance with the airline. State Bank of India sees “no room” for further lending to Kingfisher, Chaudhuri said in an Oct. 5 interview with Bloomberg TV India. The lender has already set aside provisions for its unsecured loans to the carrier, he said.
The airline has until the end of the month to provide a plan for an equity infusion to its banks, State Bank Managing Director A. Krishna Kumar told reporters in Mumbai yesterday.

‘Unchartered Territory’

On the same day, Kingfisher said it would extend the shutdown of its operations through Oct. 12. India’s aviation regulator is considering canceling or suspending the airline’s license, adding pressure on Mallya as he seeks investments to avert the carrier’s failure.
The rating companies’ projections for debt restructuring aimed at such borrowers is “shocking,” said Hatim Broachwala, a Mumbai-based banking analyst at Karvy Stock Broking Ltd.
“We are treading unchartered territory with this unprecedented spike in restructured loans,” Broachwala said in a phone interview. “Nobody knows how much of this will go bad as the banks were very lenient. The regulator has to quickly come out with measures to disincentivize lenders from taking this escape route.”
To contact the reporters on this story: George Smith Alexander in Mumbai at galexander11@bloomberg.net; Anto Antony in Mumbai at aantony1@bloomberg.net
To contact the editors responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net; Philip Lagerkranser at lagerkranser@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

India Growth to Drop to Decade Low Amid High Inflation, IMF Says By Kartik Goyal - Oct 8, 2012

Indian growth may weaken to a decade- low this year after investment stalled, the International Monetary Fund said, as it called for interest rates to remain unchanged until the nation’s high inflation rate eases.
Gross domestic product will rise 4.9 percent in 2012, less than a July forecast of 6.1 percent, the Washington-based lender said in its World Economic Outlook report today. The expansion will accelerate to 6 percent next year, it said, helped by improving overseas markets and a boost to confidence from a recent government policy revamp.
“The outlook for India is unusually uncertain,” the IMF said. “Monetary policy should stay on hold until a sustained decrease in inflation materializes.”
India’s government began the policy overhaul last month to boost the economy and avert a credit-rating downgrade, snapping months of political gridlock. The steps to curb expenditure on subsidies, contain a fiscal deficit and permit more investment from abroad triggered a surge in the rupee and buoyed stocks.
“There is an urgent need to reaccelerate infrastructure investment, especially in the energy sector, and to launch a new set of structural reforms, with a view to boosting business investment and removing supply bottlenecks,” the IMF said. “Structural reform also includes tax and spending reforms, in particular, reducing or eliminating subsidies, while protecting the poor.”
The government’s recent policy changes are “very welcome,” the fund also said. Its forecast for economic growth in 2013 compares with an estimate of 6.5 percent in July.
Indian inflation probably accelerated to 7.71 percent in September, a nine-month high, according to a Bloomberg News survey before a report due Oct. 15. The Reserve Bank of India has left interest rates unchanged since a cut to 8 percent from 8.5 percent in April, the first reduction since 2009.
To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net
To contact the editor responsible for this story: Shamim Adam in Singapore at sadam2@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.       

Record Crash Prompts Indian Exchanges to Seek New Limits By Santanu Chakraborty - Oct 7, 2012

Indian exchanges asked the market regulator to narrow the range it allows some stocks to trade after erroneous orders caused a record plunge in the S&P CNX Nifty (NIFTY) Index, according to officials familiar with the proposal.
Price limits for 216 of the biggest and most liquid stocks should be lowered from 20 percent to 9 percent, the three officials said. The measure was proposed to the Securities & Exchange Board of India by exchange executives at a meeting in Mumbai on Oct. 6, said the people, who asked not to be identified as the talks were private.
Trading in the benchmark Nifty and some stocks stopped for 15 minutes on Oct. 5 after the 50-stock gauge sank 16 percent. The incident, which briefly erased $58 billion in value, is the latest in a series of mishaps that has put pressure on regulators globally to prevent market errors. Bad trades sent Kraft Foods Group Inc. (KRFT) up as much as 29 percent on Oct. 3, and in May, the Nasdaq Stock Market blamed software for delays in order confirmations in the debut of Facebook Inc.
“Everyone is very sensitive to these electronic errors,” Adam Mattessich, head of international trading at Cantor Fitzgerald LP, said by phone from New York on Oct. 5. “It’s the kind of thing that could be nothing or it could become a financial calamity.”
Of the 4,100 companies on the National Stock Exchange of India, the nation’s largest bourse, 19 slumped 19 percent or more intraday. Reliance Industries Ltd. (RIL), the biggest company by market value, rebounded from a 20 percent plunge to close up 0.6 percent at 857.8 rupees. Housing Development Finance Corp. (HDFC), the biggest mortgage lender, lost 5 percent to 749.95 rupees after also falling 20 percent.

Wrong Orders

As many as 59 erroneous trades by a dealer at Emkay Global Financial Services Ltd. (EMKAY) in Mumbai that led to trades valued at 6.5 billion rupees ($125 million) caused the problem, the NSE said in a statement on Oct. 5.
Circuit-breaker limits enforced by the NSE get activated “after existing orders are executed,” Ravi Varanasi, head of business development at the exchange in Mumbai, said by phone on Oct. 5. “We are investigating the reason behind the wrong orders and how checks and balances at the member’s end failed.”
The NSE’s trading limits for the Nifty index range from 10 percent to 20 percent. The exchange and rival BSE Ltd., Asia’s oldest bourse, have price caps on individual stocks that range from 5 percent to 20 percent. Stocks traded in the futures and options segment are permitted to rise or fall 20 percent in a single session without a halt in trading.

‘Review Orders’

“Lowering these limits may prevent flash crashes in the future,” Nirakar Pradhan, chief investment officer at Future Generali India Life Insurance Co. in Mumbai, said by telephone yesterday. “Traders will get room to review and modify their orders” after price limits are reached, he said.
Exchange officials are meeting the market regulator today to discuss the implementation of the proposal, the people said. S. Ramann, executive director at the Securities and Exchange Board, declined to comment on the plan. BSE spokesman Ketan Mehta was not immediately available for comment.
In May 2010, high-frequency orders worsened the U.S.’s so- called flash crash, which briefly wiped $862 billion from the nation’s stocks. While the drop in India drew comparisons with rout in American equities, the U.S. event spurred many times the losses of the Nifty’s drop and affected more stocks.
About 20 companies in India saw declines of 19 percent or more on Oct. 5, compared with the more than 300 securities that lost at least 60 percent during the flash crash before the trades were canceled, a September 2010 report from the U.S. Securities and Exchange Commission and Commodity Futures Trading Commission found. The decline and rebound in the Nifty lasted seconds, compared with more than 15 minutes for stocks, futures and indexes in the flash crash.

‘Fat-Finger’

“It’s definitely concerning but we feel it was a fat- finger mistake rather than a market structural issue,” Ben Rozin, who helps manage the $600 million Manning & Napier International Fund, which includes Indian stocks, said by phone from Rochester, New York on Oct. 5. “When we look at the Indian equity market, we think it’s pretty well run, and that this has very low impact.”
The NSE controls more than 90 percent of India’s $28 billion equity derivatives market and handles 75 percent of the stock trades. The stoppage, the biggest such problem in more than two years, comes as a burst of policy reforms by Prime Minister Manmohan Singh propels Indian stocks to a 17-month high. Foreigners have plowed a net $16.5 billion into local shares this year, the most among 10 Asian markets tracked by Bloomberg, excluding China.

Volumes Recover

Combined daily volumes on the nation’s two biggest bourses averaged 989 million shares last month, 27 percent more than in August, data compiled by Bloomberg show. Trading last year in the Nifty, at 35.5 billion shares, was the lowest in four years.
“It’s not something that India needed at this stage when volumes are just beginning to recover,” A.S. Thiyaga Rajan, a senior managing director at Aquarius Investment Advisors Pte., which manages about $400 million, said by phone from Singapore on Oct. 5.
Emkay in a statement issued Oct. 6 said the “obvious and apparent error would justify the annulment of these trades,” on the NSE. The trades won’t be scrapped as the exchange’s systems weren’t at fault, said Varanasi.
Emkay’s shares plunged by the daily limit of 10 percent to 31.05 rupees on Oct. 5.
To contact the reporter on this story: Santanu Chakraborty in Mumbai at schakrabor11@bloomberg.net
To contact the editor responsible for this story: Allen Wan at awan3@bloomberg.net