How government is crowding out private investment

The government released its borrowing program for fiscal’13. While the targeted borrowing figure is about Rs 479,000 crore ($96 bn), expectations are this will be overshot by 10%.

As we have written earlier, government borrowings have ballooned in UPA govt’s regime since fiscal’09, when the government got the excuse of global slowdown to go on a spending binge. See the chart below.

See how crazily borrowings have shot up after ’08, about 4x in 5 years. This is absolutely criminal, since this is seriously straining the financial system. (state govts may be further adding to this).

The line, with its axis to the right, divides govt borrowings with annual change in banking assets, since they are the main source of govt borrowings (small savings like ppf and insurance sector make up maybe 15-20%). Till even fis’09, this ratio was within the sum of CRR+SLR, which is typically around 30%. Now, this ratio is touching around 45%. This is where pvt sector will get hit.This show there is very little room to cut rates, since govt may end up sucking more than the statutory levels from the banking system. Or what else? A sovereign bond?

Since govt spends never go down, fiscal deficit and govt borrowings arent doing down in a hurry either. The UPA curse will linger on us for a long time indeed..

In light of the above, now read this line from Manas Chakrabarty’s article today in Mint. He says ‘The Bloomberg data show that total market capitalization for the Indian market, in US dollars, has shrunk by 33.5% between the end of 2007 and 27 March 2012′.- This is when the govt’s spending binge started.

Manas also says, ‘That’s in spite of India being relatively unscathed by the crisis and despite the much higher growth in the Indian economy‘. – I think this is what most people are getting wrong. We did not come out unscathed. We have paid a heavy price for the govt’s stupidity. All that spending – what has it achieved? Infra progress is heavily behind schedule. Power sector is a joke. Business confidence is dented. And we are trapped in systemic inflation and structurally high interest rates.

Cost of Funds for Banks

Cost of Funds for Indian Banks

Kotak isnt too bad on cost of funds in the pvt banking space. Another table below, which is for Q4 FY10 it seems. This shows BoB and BoI are doing a good job of keeping cost of funds low.  Bank of India has had a rough time in the last 12 months, with NPAs shooting up, it also reported jump in slippages. But potentially better upsides than a BoB, since stock has underperformed as well

Cost of Funds

ICICI Bank’s NPA ratio for Retail

In a Feb10 PPT, ICICI Bank says 50% of retail NPAs are from unsecured loans. Retail NPAs at that time were Rs 2778 crore. NPAs from unsecured retail credit should then be about Rs 1400 crore.

Retail loan book at the time was Rs 80,700 crore. Of this, unsecured lending appeared to be 12%  – 7% in personal loans, and 5% in credit cards. This means unsecured book size was about Rs 10,000 crore. NPA ratio here – 14%.

No wonder, ICICI Bank wants to get out of unsecured loans. The figure would have been higher at its peak. All those who entered this market in FY08 with great gusto have met the same fate – Citi Finance, Chola, Indiabulls…

Moore’s law in financial inclusion?

Fino's growth rate

The chart shows the time FINO has taken to expand its customer base. Quite a remarkable rate.  The rate may have settled down at about 35-40 days per million customers, since FINO now claims 13mn customers. This data is around Aug09.

IRDA to fight SEBI

We should have written this the other way around – SEBI to fight IRDA. But really, IRDA does not really have a chance. It may be able to delay the inevitable, by going to court, but this had to happen. With MFs going no-load, there is no way insurance can charge what it does. Co-incidently, had an intereting chat with the MD of a distribution firm recently, before the SEBI order. This is what he said – “We have a target of Rs 100,000 per month, per distribution agent. He can achieve this by maybe selling insurance to 6 clients, or by selling MF policies to maybe 200 clients. So it is a great challenge to prevent mis-selling (as in, selling wrong insurance policies)”.

So you get the drift – insurnace is too heavily incentivised, creating a lot of scope of mis-selling. So what SEBI is doing is in the right direction.

IRDA’s reaction has been interesting. It has come out vehemently against SEBI. See this para from a press release on its site..

The observance of the above referred SEBI order would cause the stoppage of all renewals of insurance policies already invested by the insuring public, may result in the forced premature surrender of insurance policies causing substantial loss to the policyholder and to the insurers. The effective stoppage of the sale of the said products will cause a complete drying up of the revenue flows to the insurance companies which could disrupt the payment of benefits on maturity, on death and on other admissible claims, putting the policyholder and the general public to irreparable financial loss. The financial position of the insurers will be seriously jeopardized thus destabilizing the market and upsetting financial stability.

IRDA is pretty much admitting that all insurance companies do, is to sell ULIPs.

Competition hits NSE..

Just how good competition is good for consumers can be seen on the websites of NSE and the BSE. NSE seems to have renovated its site in the last 1-2 days. The front page, which was the same for as long as i can remember, is different, and several new features on the site. Little things like you can actually sort table on the site on whichever variable u want. Value research and many other sites have had this feature for atleast 2-3 years.

BSE has already been upto making changes on its site. The new CEO seems to be upto something at the BSE.

Another big reason for both exchanges to work harder must be the impending must be the coming launch of MCX, which is far more street savvy that either of these two incumbents.

It amazes me how little both NSE and BSE have done to help investors in the last decade. There is so much they can do to make information available to investors in a user friendly way.

We really need MCX to come and shake up the market a bit

Financial costs too high, says Grantham

Interesting point from Jeremy Grantham’s Jan-10 newsletter

It is so obvious in this business that it’s a zero sum game. We collectively add nothing but costs. We produce no widgets; we merely shuffl e the existing value of all stocks and all bonds in a cosmic poker game. At the end of each year, the investment community is behind the markets in total by about 1% costs and individuals by 2%.

And the costs have steadily grown. As our industry’s assets grew tenfold from 1989 to 2007, despite huge economics of scale, the fees per dollar also grew. There was no fee competition, contrary to theory. Why?

1.  Agency problems – we manage the other guy’s money, and
2. Asymmetric information – the agent has much more information than the client.

 Clients can’t easily distinguish talent from luck or risk taking. It’s an unfair contest, nothing like the fair fight assumed by standard Economics. As we add new products, options, futures, CDOs, hedge funds, and private equity, aggregate fees per dollar rise. As the layers of fees and layers of agents increase, so too products become more complicated and opaque, causing clients to need us more.

As total fees in the past grew by 0.5%, we agents basically reached into the clients’ balance sheets, snatched the 0.5%, and turned it into income and GDP. Magic! But in doing so, we lowered the savings and investment rate by 0.5%. So, we got a short-term GDP kick at the expense of lower long-term growth.

This is true with the whole fi nancial system. Let us say that by 1965 – the middle of one of the best decades in U.S. history – we had perfectly adequate fi nancial services. Of course, adequate tools are vital. That is not the issue here.

We’re debating the razzmatazz of the last 10 to 15 years. Finance was 3% of GDP in 1965; now it is 7.5%. This is an extra 4.5% load that the real economy carries. The financial system is overfeeding on and slowing down the real economy. It is like running with a large, heavy, and growing bloodsucker on your back. It slows you down.

The Morons at the BSE (shud learn from MCX)

The Bombay Stock Exchange has amazing capacity to surprise. They have released their half year results today. Check this  –

BSE Financials for H1 2010

What do they tell you? To me, it seems BSE still thinks it is a technology company. When BSE lost the race to NSE in the late ’90s, it realised the need for technology, invested quite a bit in it. But the point is – all they will get by doing that is achieve parity with NSE on technology experience. That will not get them market share.

This is a year in which BSE has a new CEO -  a grad from some US B school – and markets are up, revenues are up. And what do they do? They reduce their already miniscule ad spends to almost zero. Way to go, blockheads. (tho, one must give Madhu the benefit of doubt, the kid is too new into the job, and also too wet behind his ears).

To get market share, they need to think like a marketing company. The contrast with MCX could not be more striking. MCX is promoted by a technology company. Yet, it thinks absolutely like a marketing company. It is the P&G of the exchange business.

MCX is entering the equity exchange space. B school kids readin this – watch how they market themselves.

Life Insurance – More Data

Capital Invested and Business Size

 On Nov 1, we wrote a bit about insurance companies. This table from an article in ET by Kamesh Goyal of Bajaj Allianz has some excellent concise data.

It is interesting how the two most aggressive companies ICICI and Reliance have lost the most amount of money so far. SBI and Bajaj are doing somewhat better. As Kamesh points out, break evens for many of these companies are running late by 3-4 years.

Insurance value creation

Most investors companies in India are part of larger conglomerates. For ex, Aditya Birla Nuvo is the holding company for Birla Sunlife. Figuring what value to attach to the insurance business is often a tough task for the lay investor.

Here’s some info from a recent I Sec report. There are 2 bits of data – value estimation of a few companies and a graph which shows how much total capital has been invested in the business.

The first table shows values created. For ex, I Sec calculates that I-Pru is worth about Rs 32,000 crore and HDFC Standard Life is worth a litte more than Rs 14,000 crore.

The following chart shows capital invested. For ex, I-Pru has invested almost Rs 5000 crore, while HDFC Standard Life seems to have invested around Rs 1500 crore.

So the key part is this. For I Pru, the capital invested has multiplied about 6-7x. For HDFC, it seems to have gone up by maybe 9x. SBI has done better than most, Rs 1 invested by the parent is perhaps Rs 20 now, since it has leveraged its distribution network.
Of course, for a new entrant, these multipliers wont work. The companies mentioned here have been in the business for about 9-10 years now.

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