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loan moratorium: Borrowers seeking loan moratoriums rose after June; will be judicious on loan recasts: Axis Bank

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MUMBAI: Axis Bank on Tuesday said there was an uptick in the number of borrowers who opted for loan moratoriums after June and emphasised that the lender will be “judicious” in restructuring borrowings under the new rules. About Non-Performing Assets (NPAs), the bank’s Chief Executive Officer and Managing Director Amitabh Chaudhry said its stress tests are now showing lower slippages across any scenario than earlier.

“The 9.7 (per cent) was the number as of June 30. Obviously over a period of time some more customers do ask for moratorium, so I can definitely say that the number has gone up a little bit rather than coming down, which has happened for everyone,” Chaudhry told in an interview.

The chief of the country’s third largest private sector lender was responding to a query on the quantum of loans under moratorium at the end of August and how it compares with the figure for June.

The six-month moratorium for accounts impacted by the COVID-19 pandemic ended on August 30 and subsequently, the Reserve Bank of India (RBI) came out with a loan restructuring framework.

Chaudhry said the bank has received restructuring requests from both corporate and retail borrowers, and is presently formulating a framework under which such cases will be resolved. Once the framework is ready, it will be presented to the bank’s board for ratification.

According to him, the picture on asset quality will be clear only after December as the bank will be accepting restructuring proposals till then.

The bank will entertain restructuring proposals where a business has chances of revival but will not extend the benefit to cases where it sees no hope for a revival, Chaudhry said.

“I think you have to be judicious, we should definitely help the first category. But (for) the second category we must be honest enough to admit that restructuring will not help and let’s call NPA an NPA, or spade a spade,” he pointed out.

He also made it clear that sustainability of the business is very important for Axis Bank and it will not kick the can down the road.

“We want to be seen as a conservative institution, we do want to very clearly tell our investors and depositors that we will do the right thing and we will take the provisions upfront,” he said.

When asked about capital, Chaudhry said the buffers were anyways sufficient to take care of the requirements before a Rs 10,000 crore-infusion in August and added that the exercise was a cautious move carried out on the recommendation of RBI and investors.

He said the stress tests being carried out by the lender are showing that the impact on the bank in either the base, moderate or severe scenarios will be lower than what was assumed earlier which gives it a lot of comfort.

“Our models now show that the overall losses which we would take, have only come down over a period of time. Our position has become a little more comfortable,” he said.

Chaudhry said NPAs in the retail category, which has been the focus for lenders for nearly a decade, will see a spike because of the unprecedented crisis brought about by COVID-19 and that the situation will turn around with a revival in the economy.

He stressed that the bank will go back to serving the retail segment as any big bank will be doing.

At present, there is a fight for quality borrowers in the system which has resulted in Net Interest Margins (NIMs) for banks coming under pressure, Chaudhry said, and added that the same trend will be on display in the second quarter results as well.

Corporates are repaying debt through equity infusions as well, he said, pointing out that this may lead to a reduction in corporate loan books as well at banks.

He, however, declined to share any numbers for Axis Bank citing the silent period that it is in before the announcement of quarterly financial results.

The bank continues to seek to achieve the 18 per cent target on return on equity but the COVID-19 crisis may push the timeline for it because a year’s gains have been impacted, Chaudhry said.

On senior management exits, Chaudhry said the largest bulk of exits were triggered by concerns over personal conduct like corporate governance or integrity, a few were due to a mismatch of responsibilities and individual aspirations, and the rest were due to personal compulsions.





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Post office schemes’ interest rates higher than bank FDs but look at these options too

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Interest rates on small savings schemes have been kept unchanged for yet another quarter (that is for the quarter ending December 30, 2020). With this, the difference in interest rates between small savings schemes and bank fixed deposits has increased, i.e., the interest rate differential between the two has widened. The interest rate differential is now in the range of 0.60 and 0.40 per cent.

Even though the government slashed interest rates on post office schemes like the PPF and post office time deposits by up to 140 basis points (bps) two quarters ago (i.e., in April 2020), it has maintained status quo on rates for the past two quarters. On the other hand, banks have been relentlessly cutting FD rates for more than a year now because the Reserve Bank of India (RBI) has cut the repo rate by 250 bps (or 2.5 per cent) since January 2019.

The widening gap

After continuously cutting FD rates, the State Bank of India’s (SBI) one-year deposit now earns 4.90 per cent (pre-tax). HDFC Bank’s one-year FD is offering 5.10 per cent and ICICI Bank’s one-year FD is offering 5 per cent. The one-year post office time deposit is earning the investor an interest of 5.5 per cent pre-tax.

Let us look at the post-tax returns. Both the bank FD and the post office time deposit will be taxed depending on the tax regime one chooses and the tax slab they fall under.

Assuming an individual is in the highest tax bracket, i.e., of 30 per cent (including cess of 4 per cent), the post-tax return for SBI’s one-year FD is 3.37 per cent, and for the post office time deposit is 3.78 per cent.

In case of five-year fixed deposit, the interest rate differential is higher. Five-year post office deposit is offering 6.7 per cent whereas SBI’s five-year FD is offering 5.40 per cent. HDFC Bank’s five-year deposit is offering 5.30 per cent and ICICI Bank is offering 5.35 per cent.

These are the post-tax interest rates assuming tax slab of 30%: For SBI’s five-year FD it is 3.71 per cent and for a five-year post office time deposit it is 4.60 per cent.

Senior citizens should remember that banks offer 0.50 per cent higher interest rates for them as compared to the general fixed deposit interest rates. There is no such concession available on post office time deposits for senior citizens.

The effective interest rate for senior citizen bank FDs is as follows: SBI one-year FD is 5.40 per cent, HDFC Bank one-year FD is 5.60 per cent and ICICI Bank one-year FD is 5.50 per cent.

To cushion the impact of falling FD rates for senior citizens, banks have launched special FD schemes for such investors. These special FD schemes offer higher interest rate for a specific tenure over and above the 0.50 per cent.

For instance, SBI’s We Care deposit scheme offers 0.30 per cent over and above the existing interest rate, which is 6.2 per cent. Here the FD must be kept for five years. Similarly, HDFC Bank offers 0.25 per cent over and above the existing interest if a senior citizen invests for a minimum of five years and one day. ICICI Bank’s Golden Years FD offers 0.30 per cent for minimum tenure of five years and one day.

Here also, the five-year post office time deposit is offering higher interest rate than a bank FD:

  • Post office time deposit: 6.7 per cent
  • SBI We care FD: 6.20 per cent
  • HDFC Bank Senior Citizen Care FD: 6.25 per cent
  • ICICI Bank Golden Years FD: 6.30 per cent

What should investors do?

With this widening interest rate differential, what should fixed income investors do? Investors can consider options other than bank FDs as these are currently offering low rates of interest. However, keep in mind that bank FDs offer good liquidity (although often with a penalty). Similar level of liquidity is offered by very few other options (offering comparable safety) such as post office time deposits.

One option to consider is RBI’s Floating Rate Savings Bonds, 2020 (Taxable). These bonds are currently offering 7.15 per cent; with the first interest rate reset date due on January 1, 2021. However, liquidity of these bonds is extremely limited or negligible.

In case you are looking to invest in FDs for five years, an alternative for you is the National Savings Certificates (NSC). For the third quarter of the current fiscal, NSC is offering 6.8 per cent which is higher than the bank FD rates by at least one per cent.

For senior citizen investors, safety and returns play an important role while choosing an investment vehicle. For that, they can consider fixed income products like the Senior Citizen Savings Scheme (SCSS) and Pradhan Mantri Vaya Vandana Yojana (PMVVY). Both offer returns over 7 per cent a year.

Raj Khosla, Founder and Managing Director, MyMoneyMantra says, Deposit rates have been on the decline for some time and are unlikely to move up anytime soon. Returns and safety are key criteria for Senior Citizens when making deposits. SCSS and PMVVY are two schemes worth considering given better returns vs Bank FDs/Post Office schemes. Additionally, tax concessions are available to Senior Citizens which help improve the post tax return from deposits. Essentially, in today’s climate, I would recommend safety over returns.”





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‘Allocate more to diversified funds, not sectoral funds’

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Sachin Trivedi, Head of Research for UTI Mutual Fund and manager of UTI Transportation and Logistics Fund, defends sectoral funds saying these have outperformed Nifty in a relatively longer term.


Blue chip indices for a while have been consolidating in a narrow range. At the same time, small and midcaps have come into their own — a clear shift in allocation of money is seen.Are you going with the trend and pouring more money in broader markets?
I agree with you that in the last 3 months and 6 months, Nifty midcap 150 index and Nifty small cap 100 index have outperformed the Nifty index. But even after this move, both these indices are underperforming Nifty50 on a 2-year timeframe. However, within these indices, performance has been skewed and only a select few stocks contribute a large part of the gains. From a fund perspective, we select stocks based on fund mandate and style.

Further, stock selection is a bottom-up approach based on company fundamentals and longer-term outlook. Therefore, exposure to market cap is the outcome of stock selection. Having said that, in the last 6 months (from Feb 2020 to August 2020), UTI Transportation and Logistics Fund’s (UTI T&L Fund) allocation to the largecap stocks has increased from 64% to 71%.

SIPs in general, and especially in your logistics fund, has not delivered any returns in the last five years, yet the mutual fund community swears by it. How would you convince an investor who has lost money in your fund?
Both 3 and 5-year SIP returns for the fund are negative, but the 10-year outcome is still strong and better than Nifty50. UTI T&L Fund is a sector fund and allocation to Auto and Auto ancillaries companies is ~85%. In the last 3 and 5 years, BSE Auto index has given negative returns. Last few years, especially FY20, have been challenging for the sector. In FY20, the auto Industry including 2-wheelers, passenger vehicles and M&HCVs has seen the sharpest decline in volume in the last four decades. However, amidst near term concerns, the longer-term growth trajectory for the auto sector remains intact as India’s per capita income increases with improvement in GDP. Furthermore, as auto demand marches towards long-term averages, growth rate in the industry should catch up. In that case, not only are volumes expected to improve for the players, but operating leverage would also come into play, resulting in improving profit, cashflows and return ratios.

Problem with thematic funds is that they perform in phases. NBFC/bank focussed funds were rising in 2017; 2018-19 saw IT-focussed funds outperforming; pharma is soaring in 2020. It seems you have to be invested in flavour of the year to make any money, which goes against the rules of ‘not timing the market’. How should a common investor navigate this problem?
Sector selection requires skill and time and outcomes are uncertain. At the same time, 10-year annualized returns (for a period ending 30th August 2020) for NSE Bank, NSE Pharma, NSE IT and NSE Auto was 9.23%, 11.16%, 13.8% and 8.63% respectively v/s Nifty Index annualized return of 9.31% during same period. Therefore, it has been a mixed outcome and even underperformance in Banking Index and Auto index has been after accounting for steep underperformance in the recent timeframe as pointed out by you.

“While selecting the sector fund, investors should pay more attention to the longer term growth potential in the sector and should not be swayed by the market trends.”

— Sachin Trivedi

Instead of trying to time the market, my advice to the investor is to focus on asset allocation and stick to the plan. Having made asset allocation, investors may choose to allocate a certain percentage to sector funds, where longer term growth outlook is strong and valuation does not factor in the true potential of that growth. Having said that, a larger part of equity allocation should be towards diversified funds.

Recently an auto executive said high taxes on cars were not conducive to expanding their business. But the government has limited legroom to cut taxes because of its own fiscal math. Do you think there is a perfect recipe for demand to spiral downward? How can the government keep taxes high yet not hurt demand?
Tax structure for the industry has been largely stable post introduction of GST. Stability of tax structure is important, but any cut is also welcome. However, from the auto industry perspective, the real problem is slower individual income growth and rising cost for end vehicles. Costs have gone up due to factors like change in emission norms, and safety standards. Incremental pressures have also come from factors like hardening of lending norms by financial institutions, uncertainty regarding validity of registration of BS4 vehicles and expectation for cut in GST rates which resulted in buyers postponing decisions. Over a period of time, as individual income growth picks up, stable pricing should result in an improved demand environment for the sector.

For the last five months, equity inflows have been falling — last two months showing outflows. This shows a clear trend of decreasing love for mutual funds from investors. What do you think is the problem there — low returns, lack of innovation in products, constant underperformance to benchmarks or all of them? What can industry do to win them back?
It is true that overall inflows into the equity side of mutual funds have faced pressure in the last few months. Even inflows through SIPs have slowed down but the SIP route should be the preferred one for the retail investors as it helps them reduce market timing risk. But when we look at a longer term picture, overall AUM growth for Industry between end FY13 to end September 2019 was 19% CAGR. On a matrix like MF AUM as percentage to GDP, India stands close to 12.5% (end FY19), which is below world averages of ~55% and way below markets like USA which is more than 100%. Further, Mutual fund penetration in smaller cities is even lower. To improve the penetration level, industry needs to improve awareness among investors and continue to educate them so that they make appropriate choices.

I am a 30-year old risk taking investor and want to be invested in equities only, with a horizon of 3-5 years. In what sectors should I invest? Will your advice change if the time horizon is extended?
My advice to the investor is that first he/she should firm up the asset allocation plan based on end goal and resources. Having firmed up the allocation, one should stick to it and make regular reviews of the same. Within the equity portion, a large part of the investment should go towards diversified funds. Ideally, allocation towards sector funds should not be more than 15 to 20% and that too considering the risk profile of the investor. While selecting the sector fund, investors should pay more attention to the longer term growth potential in the sector and should not be swayed by the market trends.





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India’s top court orders airlines to refund bookings during coronavirus lockdown

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NEW DELHI: India’s top court on Friday ordered airlines to refund passengers who were forced to cancel tickets booked during a two-month, nationwide lockdown to stop the spread of the novel coronavirus.

The Supreme Court told airlines to refund the money within three weeks in a decision that will add to the burden on cash-strapped Indian carriers whose revenues have been hit by coronavirus restrictions on air travel.

The lockdown, imposed on March 25, banned domestic and international travel, closed factories, schools, offices and all shops other than those supplying essential services.

It caused extensive economic disruption and measures were eased from May as the virus was still spreading.

Indian airlines, including Vistara, a joint venture between Tata Sons and Singapore Airlines, IndiGo and SpiceJet Ltd, have sought interest-free credit of at least $1.5 billion from the government to enable them to cope with the loss of revenue from the pandemic.

A three-judge bench of the court said for cancellation of bookings for travel after the lockdown period, airlines must give refunds within 15 days of the order or, if the carriers are in financial distress, provide a credit that can be redeemed until March 31, 2021.

The credit shall be transferable and for use on any sector covered by the airline. To encourage customers to use the credit, airlines must pay nominal interest each month on the amount until March 31, 2021.

If the amount is still unused, carriers must offer a refund, the court said in its 35-page order.

The ruling comes in response to petitions filed by various individuals and organisations including Air Passengers Association of India and Travel Agents Federation of India that alleged violation of refund rules by airlines.





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