Crisil Report - Big Shift in Financialisation - vrk100 - 19Dec2022

Crisil Report - Big Shift in Financialisation

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Crisil Limited, an S&P Global company, has come out with a report on financialisation trends in India. The report named 'Big Shift in Financialisation' highlights the trends of financialisation in India in the past five years, that is, between March 2017 and March 2022.

The report says savings in the country are being channeled beyond simple bank fixed deposits to risk assets via portfolio managers through investment vehicles, like, mutual funds, portfolio management services (PMS), alternative investment funds (AIFs) and life insurance. 

Financialisation is a process whereby investors move away from traditional / physical assets, like, real estate and gold towards financial assets, such as, mutual funds, insurance and PMS. 

Financial assets being managed by India's investment industry (Crisil reports terms it as 'Managed Investments Industry') have grown from Rs 63.3 lakh crore in Mar2017 to Rs 135.0 lakh crore in Mar2022, showing a compounded annualised growth of 16.4 percent. 

 

Investment industry in India includes, life insurance, mutual funds, retirement funds (such as, provident funds and NPS or National Pension System), PMS and AIFs. 

Reasons for increased financialisation in the past six to seven years include: efforts for financial inclusion, increased digitisation, rise in middle-class disposable incomes and government incentives (like, tax benefits) for the financial instruments. 

Increased awareness among youngsters and penetration of mobile apps for easy investing following lower broadband prices have also nudged investors toward financial assets. 

Between 2018 and 20222, savers have suffered steep drop in interest rates (for bank deposits, etc.), which forced investors to look for alternative avenues, like, stocks and mutual funds. All these have contributed to increased share of financial assets in household savings.

Pronab Sen, former chief statistician of India, talking to CNBC TV18 on 17Dec2022 on the Crisil report says, "The move by savers from bank deposits to other financial assets, such as, stocks, mutual funds, insurance and PMS, is a threat to economic growth. Funds are moving from a fungible (bank) kitty -- that lend money to a whole range of entrepreneurs, from small and medium enterprises to large corporates -- to a thin layer of capital markets from which only large corporates can access money. The result is more money is being funneled to a smaller group of large entities. Insurance companies and mutual funds provide equity capital only to a select group of companies via IPOs or initial public offers."

 

Of the managed investments industry, investors are shifting more towards equity products as compared to debt products. The share of equities in investment industry increased from 24 percent in Mar2017 (Rs 15.3 lakh crore of Rs 63.3 lakh crore) to 31 percent in Mar2022 (Rs 41.6 lakh crore of Rs 135.0 lakh crore).

Among the financial assets, bank fixed deposits remain the most preferred financial instrument in the country, though their share has declined over the years, with investors moving towards capital market instruments.

In aggregate, the investment industry with Rs 135 lakh crore of assets has grown at a faster pace of 16 percent CAGR in the past five years (2017-2022) compared with bank deposits, which grew from Rs 108 lakh crore in Mar2017 to Rs 170 lakh crore in Mar2022, clocking a 10 percent CAGR in the same period.

The Crisil report lauds India's asset management companies or AMCs (mutual fund industry) for playing a pivotal role in increasing financialisation in India. 

 

Table 1:  Growth of Managed Investments Industry 2017-2022 >

 

Table 2: Share of Managed Investments Industry in GDP (gross domestic product or national income) > 

PMS, AIFs, EPFO and NPS

 

Over the past decade or so, there has also been a sharp rise in investor flows into big- ticket capital market instruments such as alternative investment funds (AIFs) and portfolio management services (PMS).

 

As shown in Table 1 and 2 above, India's managed investments industry is dominated by life insurance, followed by mutual funds and provident funds. However, in the past five years, alternative investment funds have been growing at an annualised rate of 50 percent though their share in GDP is only 6.4 percent (Mar2022).

 

Assets under NPS rose to Rs 7.36 lakh crore as of Mar2022, clocking 33.7 percent compound annual growth rate (CAGR) over five years. Within this, the share of the private sector rose to 20 percent (from 12 percent in Mar2017). 

Alternative investment funds (AIFs) and portfolio management services (PMS) require minimum investment of Rs 1 crore and Rs 50 lakh respectively. Increasing formalisation of labour sector is contributing to higher growth of assets under management (AUM) of PFs and NPS. 

EPFO and provident funds manage their assets through PMS. Provident fund money accounted for over 80 percent of the PMS industry as of March 2022. It is expected to retain this share and drive growth of the segment over the next five years as the economy gets formalised and more people get employed in the organised segment. Other investors in PMS are high networth individuals (HNIs).



The minimum investment amount required for PMS is Rs 50 lakh. While this amount is less than the minimum requirement for AIFs – Rs 1 crore – the PMS investors pay the whole amount in a single tranche, while AIF investors pay the same in different tranches as and when the capital is called. 

 

Employee Provident Fund Organisation (EPFO) started investing in Indian stocks through the exchange traded funds (ETFs) route in Aug2015. This too has boosted not only the investment industry growth but also the stock market performance.

Going Forward

 

The Crisil report forecasts the managed investments industry will grow from the current Rs 135 lakh crore (57 percent of GDP) to Rs 315 lakh crore (74 percent of GDP) by Mar2027, showing a CAGR of nearly 19 percent. 

 

However, it is worth noting financialisation of savings and its increasing flow into the managed investments industry has been backed by buoyant debt and equity markets fuelled by excessive liquidity. Any prolonged disruption in the financial markets or liquidity conditions may have an impact on investor experience in future.  

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References:

Tweet 19Jun2021 - FM Chidambaram initiated EPFO into investing in Indian stocks via ETF route  

 

Tweet 15Oct2022 - economic reforms are a continuum

 

PIB press release 26Jul2017 - investment pattern of EPFO funds in ETFs

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Disclosure:  I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.

Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets. 

CFA Charter credentials  - CFA Member Profile

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He blogs at:

https://ramakrishnavadlamudi.blogspot.com/

https://www.scribd.com/vrk100

Twitter @vrk100

Primer on Credit Rating Scales - vrk100 - 10Apr2022

Primer on Credit Rating Scales

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You may have observed several companies advertising in newspapers and claiming they have 'AAA' or 'AA' rating for their deposits. For example, Bajaj Finance Limited's invitation to offer claims 'AAA' rating for its deposits, while Muthoot Finance claims 'AA' rating for its deposits.

Similarly, companies too will be offering their debt instruments (like, bonds, debentures, etc.) to select investors when companies raise money from capital markets. These debt papers will be having credit ratings ranging typically from 'AAA' to 'D.'

A credit rating is an evaluation of a company's ability to repay its loans and other financial obligations. These ratings are given by credit rating firms based on the financial strength of companies and their ability to repay principal and interest of the debt instruments. 

Credit ratings may also be done for fund-based bank facilities, like, working capital loans, term loans for equipment finance; and for non-fund based facilities, like, letters of credit and bank guarantees.

As of now, there are seven registered credit rating agencies in India as per Securities Exchange Board of India (SEBI), India's capital market regulator:

 

Crisil Ratings Ltd, 

ICRA Ltd, 

Care Ratings Ltd, 

India Ratings & Research (ex-Fitch Ratings), 

Brickwork Ratings India, 

Acuite Ratings & Research, and 

Infomerics Valuation & Rating

 

Short term debt rating is for instruments with a maturity of upto one year and long term debt rating is for maturities above one year. 

 

Typical credit rating scale (Long term debt):

 

 Please click on the image to view better >

The terms highest safety, high safety and safety shown in the above table are on a relative scale. For example, Crisil Ratings has recently given a rating of Crisil AAA/Stable for Marico Limited's long term debt instruments. Here, 'AAA' indicates highest safety as regards repayment of principal and interest.

Likewise, MSTC Limited received a rating of Acuite A+/Stable from Acuite Ratings & Research last year. Here, 'A' indicates adequate safety with regard to repayment of principal and interest.

'AAA' indicates top rating and 'D' signifies lowest rating in the above table. In addition, the credit rating firm giving the rating may add its own name or other symbol to differentiate the firm's rating from another firm's rating. 

For example, India Ratings & Research had recently given a long-term rating of IND AA+/Stable for Tata Steel's non-convertible debentures (NCDs). Here, 'IND' indicates the credit rating is from India Ratings & Research; AA+ indicates rating and 'Stable' shows the future outlook.

 

Likewise, ICRA Limited may prefix 'Icra' to its ratings.  

 

 

Typical credit rating scale (Short term debt):

 

Please click on the image to view better > 

P.S.: A company is having a credit rating of say, AAA-/Stable--this will be pronounced as 'Triple A" minus with stable outlook. Likewise, another company's A+/Negative rating will be pronounced as 'Single A' plus with negative outlook. 

P.S. dated 31Oct2022: SEBI Circular dated 31Oct2022 - Standardisation of Rating Scales Used by Credit Rating Agencies (CRAs)

 

- Standard descriptors for Rating Watch and Rating Outlook 

 

- Rating symbols and definitions

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Weblinks and Investing

-------------------

References:

Crisil Ratings scales 

Credit Rating scale

ICRA Rating scale

Mapping of ICRA Limited's long and short term ratings

Mapping of Crisil Ratings' long and short term ratings

Crisil wrt recognising default

Disclosure:  I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.

Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets. 

CFA Charter credentials  - CFA Member Profile

CFA Badge

 

He blogs at:

https://ramakrishnavadlamudi.blogspot.com/

https://www.scribd.com/vrk100

Twitter @vrk100

 

Spectacular Rise of Rupee Amidst Weak Leadership

After touching an all-time low of 68.80 on 28 August 2013, the Indian rupee has resurrected miraculously to 63.48 by 13Sep2013 against the US dollar. The amazing upsurge of rupee by almost eight per cent in just a matter of two weeks has been attributed to various reasons. In this backdrop, let me try to dig deeper and come out with my own theory.  

As explained simply in the above graph, various reasons could be attributed to the rise of rupee in the last two weeks. All these things, we’re able to tell with the benefit of hindsight. If you’d asked the finance minister P.Chidambaram what went right with the rupee, he would have smiled very confidently and responded by saying that “I told you so!” If you’d asked the so-called market experts they would say it was the “Rajan Effect.”

It was global factors such as oil prices cooling off following the US postponing its potential attack on Syria, others would argue. Some even attributed rupee’s recovery to India’s trade deficit easing a bit in August 2013. The overwhelming rise in Indian stock markets too helped the rupee gaining ground; and in fact the reverse is also true! Global markets too have rallied smartly last week. Media headlines often don’t tell the full story.

The “Rajan Effect”:

Upon taking over as RBI governor, Raghuram G Rajan announced a raft of measures—which inter alia include, fast tracking issue of new bank licences, window for banks for swapping FCNR (B) deposits, and freeing bank branch licensing. The speed with the new governor has acted has positively surprised the markets. The rupee strengthened and the stock markets soared. It remains to be seen how long this optimism lasts.

The RBI may have definitely intervened in August this year also, by selling dollars and propping up the rupee. Between May and July this year, RBI sold US dollars worth $8.34 billion in the foreign exchange market. The August figures will be known next month. RBI’s foreign exchange reserves are $275 billion, down $17 billion since Mar2013 end.

See my piece: What to Expect from Raghuram Rajan?-04Sep2013:

http://ramakrishnavadlamudi.blogspot.in/2013/09/what-to-expect-from-raghuram-rajan.html

Syrian Crisis on the Mend:

The US was planning to attack Syria a few weeks back. The US has now postponed that plan after Russia intervened in the matter. Russia has proposed a plan to put Syria’s chemical weapons under international control. It was earlier feared by the markets that any US attack on Syria would spread Syria’s bloody conflict to the entire middle-east, jeopardizing the prospects of global economy.

An internal war has been going on in Syria for more than two years between President Assad’s government forces and rebels; the latter are supported by several western nations. Reports indicate that chemical weapons were used last month in Syria killing hundreds of people. The United Nations is investigating the matter. Since 2011, more than 100,000 people have been killed and 2 million have been displaced.

RBI-BOJ Bilateral Swap Arrangement (BSA):

On Sep62013, Reserve Bank of India and Bank of Japan decided to increase their bilateral swap arrangement (BSA) from USD15 billion to USD50 billion. This facility enables both nations to swap Japanese yen or the Indian rupee for US dollars in emergency situations. It irons out short-term liquidity difficulties for India and Japan. The BSA is expected to lend stability in financial markets. In fact, the increase in the facility has boosted the confidence and partly contributed to rupee’s appreciation against the dollar. The BSA was first signed in 2008 for $3 billion, but was later increased to $15 billion in December 2012 when the facility was renewed for a three-year period.  

 RBI’s Swap Window for OMCs

The Reserve Bank on 28Aug2013 offered a temporary swap window facility for public sector oil market companies (IOC, HPCL and BPCL) to enable them to buy or sell US dollars. With this, OMCs are out of the foreign exchange market reducing the dollar demand. The OMCs’ demand per month is said to be around $9 billion.

 To Sum Up:

We can’t definitely point out the real reasons behind the rupee’s rise. It could be a combination of factors—wild swings in investor sentiment, the slew of measures announced by the RBI, FIIs coming back to India once stocks become cheaper, OMCs going out of the foreign exchange market or some factors unknown to us!

The fact of the matter is: We don’t know for sure. It’s in the nature of markets to swing between moods of downright pessimism and lofty exuberance. As George Soros put it in his book The Alchemy of Finance: “The stock market is generally believed to be anticipating recessions; but it would be more correct to say that it can help to precipitate them. Markets are always biased in one direction or other. Markets can influence the events that they anticipate. Markets have a way of making predictions come true!”  

Where is Rupee Headed in the Midst of a Weak Leadership?

India’s growth will depend on external and internal factors. However, it’ll be more of the latter. The latest quarterly gross domestic product (GDP) growth of 4.4 per cent is far from flattering. Manufacturing sector is down in the dumps. Rating agency Crisil has warned that services sector growth may slump to 6.5 per cent in 2013-14, bringing down the overall growth rate to 4.8 per cent, which will be a decade’s low. Demand slowdown in the economy may negatively impact two of three sectors, reducing their revenues.

Crisil has cautioned that the collapse of the investment cycle will hamper infrastructure, capital goods, automobile and real estate sectors. Highly-indebted companies will suffer more, with tight liquidity, stretched working capital cycles and increased interest burden. Crisil has further stated that rupee depreciation will help IT-ITES, pharmaceutical, textile, garment and other sectors, easing the current account deficit. Agriculture growth may improve to 4.5 per cent, easing food prices and supporting rural consumption.

Fiscal deficit may not be under control in the pre-election year. What India lacks is effective leadership. This has seriously undermined public institutions. Nobody seems to take any responsibility or accountability. If you ask the prime minister, he is putting the onus on global factors. If you ask the finance minister P Chidambaram, he’s pointing out the fingers at ex-finance minister. But the newly-retired RBI governor D Subbarao squarely blamed the central government for the current economic conditions. But who are the real culprits, you may wonder. I could say each one of them and some more (f)actors.

A noted economist Bibek Debroy recently tweeted: “Domestic actors not domestic factors are responsible (must be a typo).”

The fate of Indian rupee largely hinges on the fortunes of Indian economy. Of course, we can’t rule out global factors also. The rupee will continue to be volatile driven by external and internal factors. Some sense seems to have come to the rupee market in the last two weeks. While the positive sentiment may continue in the short-term, it’ll be back to basics in the medium to long term. Crisil has said that the rupee may rebound to 60 per dollar by March 2014. I tend to go with that figure, with plus or minus two.

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Related Articles:

India’s GDP Growth Slows-10Sep2013:

http://ramakrishnavadlamudi.blogspot.in/2013/09/india-gdp-growth-slows-vrk100-10sep2013.html

Strengths and Weakness of Indian Economy-01Sep2013:

http://ramakrishnavadlamudi.blogspot.in/2013/09/indian-economys-strengths-and.html

Recognition of Good Governance by PM-15Sep2012:

http://ramakrishnavadlamudi.blogspot.in/2012/09/the-recognition-of-good-governance-by.html

Disclaimer: The author is an investment analyst, equity investor and freelance writer. This write-up is for information purposes only and should not be taken as investment advice. Investors are advised to consult their financial advisor before taking any investment decisions. These are personal his views. He blogs at:

http://ramakrishnavadlamudi.blogspot.in/

http://www.scribd.com/vrk100

Connect with him on twitter @vrk100