Week ending 25th Jan 2025
# 1 Markets
Sensex Hits 2.5-Year Low amid Sell-Off. Sensex fell to 76,190, and the Nifty dropped 0.49% this week to close at 23,092 on Friday, marking the third consecutive week of losses. Selling pressure persists, with hopes now pinned on the Union Budget session on February 1. Despite the volatility, investor participation continues to grow, crossing 110 million, with the last 10 million added in just five months—an unprecedented pace compared to the 14 years taken for the first 10 million.
Indian bonds, set to be included in the Bloomberg EM Local Currency Government Index on January 31, saw yields ease slightly, with the 10-year G-Sec closing at 6.72%. JP Morgan’s inclusion of Indian bonds in July has already attracted ₹63,300 crore in investments. However, the banking system faces a liquidity deficit exceeding ₹3 lakh crore.
The S&P 500 hit record highs last week, with major US indices gaining 1–1.5%. The 10-year US Treasury yield fell to 4.61% amid rate cut speculation. Meanwhile, the Bank of Japan raised rates to 0.5%, its highest in 17 years, citing inflation and wage growth.
# 2 RBI
2.1 RBI’s revised guidelines on resolution of loans last week brings hope for smaller loans resolutions
- For loans up to ₹1 crore: Settlements can be approved per a board-approved policy, with restrictions to avoid conflicts of interest (e.g., individuals involved in acquiring a bad loan cannot approve its settlement).
- For loans above ₹1 crore: An independent advisory committee reviews proposals, but final approval can be given by a committee of the board, bypassing the need for full board approval.
Unlike previously, where ARCs needed to appoint an IAC for all loans irrespective of the amount, the RBI has now allowed the settlement of accounts with an aggregate value of ₹1 crore or below principal outstanding, to be done according to the board-approved policy.
In retail and microfinance portfolios, where bad loans have surged, this simplified norm is expected to enhance the efficiency of resolving small ticket stressed assets.
2.2 As per data published by RBI last Thursday,
- Aggregate Bank deposits amounted to ₹221.5 lakh crore as of January 10, while bank credit totaled ₹ 178 lakh crore. At these levels, the credit deposit ratio (CDR) is at 80.4 percent compared with 79.9 percent in the same period a year ago.
- Lending increased 11.5 percent year-on-year as of January 10, 2025, compared to over 20 percent in the same period a year ago, while deposits rose 10.8 percent in the same period
It looks like bank lending again outpaced deposit growth in the beginning of the fourth quarter putting pressure on resources. While this trend may not alter the aggregate funding available for banks, it may change the character of deposits having implications on cost of funds and margins for banks
2.3 As per Fitch report released last Thursday
- The gross non-performing assets (NPAs) of Indian banks may decline by 40 basis points to 2.4 per cent by March 2025 and a further 20 basis points in the next financial year.
- Though stress in retail loans is rising, particularly in unsecured credit, robust growth, recoveries and write-offs are expected to offset the increase in fresh bad loan.
Important to note that RBI a month before in its financial stability report expected the impaired-loan ratio to trough in FY25 before rising to around 3 per cent in FY26, from the 2.6 per cent reported in H1FY25.
Fitch reiterated that the difference in forecast from RBI partly reflects variance of opinions on the timing and extent of risk crystalisation, banks’ exposure at risk, loan growth and India’s economic performance.
2.4 Key takeaways from the CRIF – DLAI FinTech Barometer Volume II published last week
- RBI’s Financial Stability Report indicates that household debt is on the rise, with super prime borrowers (people with strong credit scores) using loans to create assets, while subprime (people with weak credit scores) borrowers are borrowing for consumption.
- Personal loans stood at ₹13.7 lakh crore as at end Sept’24. Of this, public sector banks hold the largest share, about 38%, followed by private banks with 33%, and NBFCs (non-banking financial companies) with around 24%. Matter of concern is growth in share of new loans by NBFCs to 38.7% in H1FY25 v 33.2% last year.
- Portfolio quality of personal loans has deteriorated
- PAR 31-90 days went up from 1.5% in Sept 2023 to 1.8% in, Sept 24
- PAR 91-180 days went up from 1.1% to 1.2% in the same period.
- Nearly 29.3% of people who took small ticket loans ranging between 10,000 and 50,000 in December 2023 saw their credit scores drop within six months.
- These borrowers kept taking more loans—62.7% more, and the total amount they borrowed went up by 37.6% even when their credit scores are falling.
- Situation is much worse in smaller cities where the percentage of overdue loans in the 31-to-180-day range (PAR 31–180) jumped from 6.8% to 8% in just one year.
- Unsecured business loans [UBL], has grown by 43.5% over the past year, reaching a total of about ₹7.8 lakh crore. For UBL the gap on Vintage Loans at Risk [VAR] is significant for different ticket sizes. For UBL (Rs <10L), the peak VAR was at 10.2% at 29 months of borrowing (MOB), with the highest gap of 6.3% at the same period. For UBL (Rs >10L), the peak was at 5% at 45 MOB.
- Loans against property (LAP) as of September 2024 is ₹11.3 lakh crores, which represents a year-over-year growth of 22.5% from the previous year. For LAP (Rs <10L), the peak VAR was at 5.5% at 52 MOB, with the highest gap of 1.7% at 39 MOB. For LAP (Rs >10L), the peak was at 4.1% at 65 MOB.
The report emphasizes the increasing significance of data-driven insights in facilitating responsible lending particularly for small-ticket loans essential for individuals and microenterprises. Despite some positive indicators, certain areas of the retail lending market are showing signs of stress – either people are taking more loans than they can afford, or lenders are taking too much risk for growth.
(https://www.crifhighmark.com/media/4067/crif-dlai-report_jan-17th-2025.pdf)
# 3 SEBI
3.1 SEBI in its discussion paper released last week has unveiled a proposal for promoting financial inclusion through the “sachetisation” of mutual fund (MFs) investments. Sachetisation refers to the process of offering financial products in smaller and affordable packages, making them easier to access and manage. The initiative proposes Systematic investment plans [SIP] at ₹ 250 to encourage low-income groups to begin their investment journey in mutual funds.
AUM of MFs has grown from ₹10 trillion in 2014 to ₹ 68 trillion in Nov 2024 and no. of investors growing from 1.7 cr in March 2018 to 5.18 cr. in Nov 24. Has time come now for miniaturisation of this financial product?
Comments:
- Investors can start with a small SIP of ₹250, with a maximum of three such SIPs across different AMCs. This provides an affordable entry point for those with limited disposable income.
- The payments will be restricted to auto-pay modes like NACH (National Automated Clearing House) and UPI (Unified Payment Interface), which are cost-effective for small-ticket investments.
- Small value SIP does away with ticket size-based access to the equity market.
- Risk management is built into the SIP mechanism to help convince underserved sections.
- India’s MF industry has delivered healthy risk-weighted returns under the watchful eye of SEBI. The latest proposal is an iteration of its faith that the industry can take the cult of equity to a more vulnerable segment of investors.
- Sachetisation may help more people from smaller towns and lower income groups into the formal investment space as top 5 cities account for > 50% of MF AUM (Mumbai alone 27%).
Challenges:
- Current transaction costs (RTA processing, Payment Gateway fees) add up to ₹ 2 per transaction, translating to nearly 0.8% of ₹ 250, much higher than MF Expense ratio.
- SEBI is trying to make this work by asking intermediaries to offer discounted rates including covering some costs from Investor Education Fund besides offering some incentives to distributors. But this is unlikely to cover even onboarding expenses including KYC.
It’s definitely an ambitious plan. Banking products have some form of subsidised offerings (like Jan Dhan) that get the basic job done. We hope the equity market should also be able to devise its own sachet product that widens the net by pulling down the price point.
3.2 SEBI plans
- to introduce a trading window for soon-to-be-listed shares to curb unofficial grey market transactions between the closing day of the initial public offerings (IPOs) and the listing day, to bring transparency in pre-IPO pricing.
- Sebi aims to create a structured and regulated platform for securities trading within a controlled framework, eliminating the need for informal market practices. Currently, a three-day gap – T+3 – exists between the closure of an IPO and its listing, during which “curb trading” thrives in informal markets.
- if participation is limited to investors, in the proposed platform, who are sure of allotment then that just leaves one day as allotment would be finalised on T+1. They may well wait for the third day.
- If anyone is allowed to participate without need of allotment, this causes problems too as it becomes speculative without requirement for settlement.
SEBI and stock exchanges may determine functionalities on this platform as there is no clarity as of now, as to how this market will function. Let’s wait and see how this works.
# 4 Economy
4.1 As per HSBC Composite Index released last Friday,
- Composite PMI dropped to 57.9 in January from 59.2 in December
- Manufacturing PMI rose to 58 in January from 56.4 in December
- Services index declined to 56.8 in January from 59.3 in December.
While manufacturing has shown resilience and recorded fastest growth since July Services recorded notable decline – lowest in 26 months. Nonetheless, the index has remained above the 50 critical threshold which separates growth from contraction for 3.5 years – longest uninterrupted growth streak since mid-2013.
The new data however highlights potential vulnerabilities in economic performance as it enters 2025 despite firms ramping up staff hiring at an unprecedented rate
4.2 As per report released by Ministry of Electronics and Information Technology [MeiTy] last week,
- India’s digital economy is expected to grow almost twice as fast as the overall economy, contributing to nearly one-fifth of national income by 2029-30
- In under six years, the share of digital economy will be larger than that of agriculture or manufacturing in the country.
- the domestic cloud services market and the global capability centre sector are the two fastest-growing segments.
- The adoption of artificial intelligence for streamlining operations, improving customer experience, and launching new services is likely to propel the cloud services market to a compounded annual growth rate of 24% over the 2024-27 period and may reach $20.3 billion
# 5 PE/VC
- As per EY/IVCA report released, India’s VC ecosystem grew in 2024,
- VC deals surging to 536 from 460 in 2023 and investments climbing to ₹19,900 crore (US$2.38 billion) from ₹15,371 crore (US$1.85 billion).
- Exits experienced a slight decline, dropping to 72 from 82 in 2023, with harvest values reducing to ₹21,974 crore (US$2.62 billion) from ₹28,993 crore (US$3.51 billion).
5.2 Key take aways from Kalaari ONDC report released last week
- India has 954 million internet subscribers and processes 15.4 billion digital transactions monthly, showcasing deep digital adoption.
- The digital economy’s contribution is projected to grow from 4.5% of GDP in 2014 to 20% by 2026, with a $1 trillion market potential by 2028.
- Despite significant growth, India’s e-retail penetration is only 4.3%, compared to 35% in China and 26% in Korea.
- ONDC handles 1.4 crore orders/month, with total orders surpassing 14 crores since inception.
- Over 2.21 lakh sellers onboarded, including MSMEs, Kirana stores, and artisans.
- 73% of internet users prefer regional languages. Need to reach out to 540 million regional-language users.
(https://kalaari.com/ondc-commerce-without-boundaries/)
5.3 As per its flagship inequity report “Takers not Makers” released last Monday Oxfam has made some interesting observations. (every year it releases before World Economic Forum Annual meeting)
- Billionaire wealth across the globe surged by $ 2 trillion in 2024 to $ 15 trillion at a rate three times faster than the previous year.
- The billionaire’s wealth grew at an average of $ 5.7 billion a day in 2024, while the number of billionaires rose to 2,769, from 2,565 in 2023.
- Wealth of billionaires in Asia increased by $ 299 billion in 2024 and there will be at least five trillionaires within a decade from now.
- The year 2024 saw 204 new billionaires getting minted — an average of nearly four every week. Asia itself got 41 new billionaires in the year
- There is increasing inequality as no. of people living in poverty not changed since 1990.
Contrary to the popular perception, billionaire wealth is largely unearned — 60 per cent of billionaire wealth now comes from inheritance, monopoly power or crony connections.
To recall Percy Bysshe Shelley “Rich become richer and richer, poor becomes poorer and poorer”
In lighter vein!
As per survey by Manpower Group 80% of businesses are finding it difficult to find the right talent; while as per Centre for Monitoring Indian Economy (CMIE), the rate of unemployment of India rose sharply to 9.2% in June 2024, from 7.0% in May 2024 – Where is the gap?