Week Ending 27th April 2024

Week ending 27^th April 2024

# 1 Markets

Sensex and Nifty rallied for 6 days, running on firm Asian peers but short covering and derivatives closing   on Friday, resulted in a marginal correction. Sensex closed at 73730 while Nifty ended 22419. US Markets roared higher on Friday, after the latest wave of earnings overshadowed worries about sticky inflation. All the three indices gained while Nasdaq went up higher by 4% due to reported higher tech earnings.

The US economy grew at its slowest pace of 1.6% in nearly two years as a jump in imports to meet still-strong consumer spending widened the trade deficit. US inflation rose to 2.7% in the year to March, another sign that price pressures remain stubbornly high, complicating Fed’s plan to cut interest rates this year. US bond yields therefore ended higher at 4.66% on Friday. Govt bonds in India continue to track US bond yields ignoring benign domestic inflation and ended higher at 7.22%.

Interestingly the interest rate differential between domestic and US sovereign bonds has shrunk to its lowest levels in at least 17 years, an occurrence that should drive foreign capital out of India. Surprisingly, overseas investors, however, are in no mood to shun the world’s fastest-growing major economy and so far in 2024, FPIs have net purchased $5.8 billion of domestic bonds. Interest in Indian sovereign issuances is also up through rupee Eurobonds (securities denominated in Rupees and issued in Europe) where aggregate issuance has gone up to $2.54 bn in first four months higher than $2 bn for the whole of 2023.

# 2 Banking

2.1 RBI on Friday released the most awaited order permitting voluntary transition of Small Finance banks [SFBs] into universal banking. Following conditions proposed:

• SFBs need to have at least Rs 1000 crore of net worth, as applicable to Universal Banks.
• SFBs need to be listed and profitable with gross NPA of less than 3% for the last two fiscals and less than 1% for the last two fiscals.
• SFBs need to be profitable for the last two fiscals.
• SFBs need to comply with satisfactory 5 years track record of performance besides RBI’s extensive due diligence exercise.
• RBI would prefer diversified loan portfolio.
• SFBs need not have an identified promoter wile existing promoters shall continue on transition to universal bank.
• No change to the promoter shareholding dilution plan if approved by regulator.

Who can benefit?

• AU and Ujjivan have net worth more than Rs 1000 crore.
• While AU met the profitability and asset quality eligibility norms for the past two fiscal years, Ujjivan is yet to announce their annual numbers for FY24.
• Though Equitas has announced their intent, Equitas is not immediately eligible as its net NPA ratio was higher.

2.2 RBI on April 26 issued frequently asked questions (FAQs) on guidelines for default loss guarantee (DLG) in digital lending. DLG is a a contractual arrangement between the bank and an entity under which the latter guarantees to compensate the bank for losses due to default up to a certain percentage of the loan portfolio of the bank. While issuing the guidelines in June 2023, the RBI had said that banks must ensure that the total amount of DLG cover on any outstanding portfolio — which is specified upfront — shall not exceed five percent of the amount of that loan portfolio.

What’s new?

• DLG is not permitted for credit cards, loans arranged on NBFC-P2P platforms and for revolving credit facilities.
• The cap is applicable on the total amount disbursed out of the DLG set at any given time.
• DLG amount once invoked by the RE cannot be reinstated, including through loan recovery.

2.3 RBI on Friday has released draft guidelines for digital lending to enhance transparency.

• Lending service providers (LSPs) would be required to share all available loan offers from willing lenders digitally with borrowers.
• This aims to empower borrowers by providing clear information about their loan options, including lender names, loan amounts, interest rates, and key terms. Borrowers through the digital view of loan offers should be able to make fair comparison.
• Emphasis is on unbiased content, prohibiting LSPs from favouring any particular lender.

This has been necessitated as LSPs has arrangements with multiple lenders including with some lenders where they have control, without arm’s length relationship and may like to push product from such lender which may not be advantageous from customers perspective.

2.4 RBI on Wednesday (April 24) asked Kotak Mahindra Bank to stop onboarding new customers through online and mobile banking channels, and also barred it from issuing fresh credit cards, with immediate effect.

Why such harsh action?

• The bank was found to be materially deficient in building necessary operational resilience on account of its failure to build IT systems and controls commensurate with its growth – as demonstrated by frequent significant outages in last two years causing customer inconvenience.
• The bank continued to be non-compliant with the Corrective Action Plans issued by the RBI for 2022 and 2023 – failed to address concerns raised by RBI after IT audit including –

serious deficiencies and non-compliances in the areas of IT inventory management, patch and change management, user access management, vendor risk management, data security and data leak prevention strategy, business continuity, and disaster recovery rigour and drill.

What is the impact?

S&P Global Ratings on Friday said RBI’s actions could restrain the lender’s credit growth and profitability.

• Seriously impact credit card business; Credit cards are a higher-yielding portfolio which grew at 52 per cent year-on-year as of December 31, 2023, compared with total loan growth of 19 per cent. As of March-end, Kotak Mahindra Bank has issued 59.54 lakh credit cards.
• RBI’s action could push the bank to rely more on physical branch network expansion to supplement growth thus entailing higher operating costs and thus overall growth. 72% of the new savings accounts in FY23 — 17.5 million savings accounts – the latest available data — were acquired through Kotak-811, a pure digital play.
• Kotak depending on online platform, has added just 350 branches in four years vs HDFC Bank which added 900 branches in just one year.

As expected, due to impact on growth and profitability share prices dropped by 13%. Markets feel that this action is excessive seen from the perspective that Kotak cannot add savings customers online which had been its primary channel. Rumours grind that RBI’s strained relationship is well known for years now and this extreme step has been timed with the change of guard though Uday Kotak continues to serve the Board. Kotak considered most tech savvy amongst private sector banks will take time to rebuild its image now.

2.5 RBI has notified amendments to the FEMA regulations related to purchases of shares of Indian companies on international exchanges. The notification includes permissible receipts in foreign currency that could be used for purchase of shares and permissible repatriation as under FEMA guidelines.

In January, the government permitted the direct listing of securities by Indian companies on international exchanges of GIFT IFSC to boost foreign investments and the RBI notification is for operationalisation through amendments in FEMA regulations.

# 3 Capital Markets

3.1 SEBI on Tuesday extended the cross-margin benefit between index futures position and constituent stock futures position in the derivatives segment for offsetting positions with different expiry dates.

• At present, the cross-margin benefits are provided if both the correlated indices or an index and its constituents, as the case may be, have the same expiry date.
• 40 per cent spread margin will apply for offsetting positions in correlated indices with different expiry dates, while the existing 30 per cent margin stays for positions with the same expiry date.
• For offsetting positions in an index and its constituents with different expiry dates, a 35 per cent spread margin applies, while the existing 25 per cent margin stays for positions with the same expiry date.

Cross margining enhances liquidity and financing flexibility for entities by reducing margin demands and decreasing net settlement obligations; This is particularly so when investors would take contrasting positions on a single index or stock to play safe and thus would enable larger participation.

3.2 To alleviate the problem of complying with the revised KYC guidelines effective from April 1, 2024, five KYC registration agencies [KRAs], holding records of 108.3 million customers, on Thursday, have announced simplified KYC process to ease compliance.

• Of the total, 73% of the KYC records are under ‘KYC Validated’ status, 15% are under ‘KYC Registered’ status and the remaining 12% are under ‘KYC On-Hold’ status.
  • For investors whose status is ‘KYC Validated’, no action is required, and they can transact in the securities market without resubmission of KYC documents.
  • Investors whose status is ‘KYC Registered’ can continue with their existing systematic investment plans (SIPs) already registered with mutual funds. But If they wish to open a new account or a new folio with a new fund house, a fresh set of KYC documents needs to be collected afresh to onboard the investor.
  • If the KYC status is ‘On Hold’ then the investor has to compete ‘PAN-Aadhaar Seeding’ in income tax records to make the PAN operational. After that, the investor has to share the updated email and mobile number with any of the chosen intermediaries and lodge a modification request with the KRA. Once the KRA receives the latest information it will validate and accordingly update the KYC record status.

Challenges:

• There is also no concept of interoperability with KRAs, meaning that if you have done KYC using CAMS, then you can only update the KYC with them.
• There is no option for NRIs to modify their KYC online with the new set of OVDs. NRIs wishing to modify their KYC to comply with new KYC norms actually have to travel across countries and suffer hardship to get their KYC in order physically.

Unless the Govt brings in uniform KYC across all regulators this problem is going to persist.

3.3. SEBI vide its notification dated April 25, 2024, permits

1. leverage for Cat I Infra Funds to create encumbrance on equity of investee company.
2. Leverage for Cat II Funds to create encumbrance on equity of investee company for the development of the company.

It has also notified that all AIFs need to exercise specific due diligence with respect to their investors and investments to prevent facilitation of circumvention of laws as may be specified by it. Detailed regulations are awaited.

While leveraging is most awaited, calling for diligence would be onerous. Lets wait for detailed regulations to see operational feasibility of implementation.

# 4 Economy

4.1. India has reached a milestone in its mission to build an intellectual property (IP)-driven economy.

• For the first time, Indian IP authorities granted over one lakh patents in a single year.
• India granted 1,01,311 patents between March 15, 2023, to March 14, 2024 vs 34134 during same period last year.
• No of patent applications has also gone up during the same period to 90300 vs 82811 last year.
• Applications filed towards protection of Semiconductor Integration Layout Designs grew from just one in FY22 to 8 in FY 23.

Increased innovation and IP awareness among companies, universities and individuals, is slowly becoming evident. Make in India slowly transforming to Innovate in India.

4.2 As per UNCTAD report released last week,

• India’s services exports jumped 11.4 per cent to USD 345 billion in 2023 despite global economic uncertainties.
• Sectors that contribute to India’s services export growth include travel, transport, medical and hospitality. Post Covid 19, travel receipts increased by 70% in Asia y-o-y basis.
• India’s services imports, however, dipped marginally by 0.4 per cent to USD 248 billion last year.

4.3 As per HSBC PMI released last Tuesday, India’s private sector activity expanded at the fastest pace in 14 years, as demand fuelled new business intake and output, according to preliminary data released Tuesday, providing a good start to the year.

• The HSBC Flash India Composite Purchasing Managers’ Index (PMI) output index, compiled by S&P Global, climbed to 62.2 in April from a revised reading of 61.8 in March.
• The strong expansion, according to the data, was led by services activity which rose to a three-month high of 61.7 from 61.2 in March, on new businesses. Manufacturing PMI came in at 59.1 this month similar to March. Both output and new orders for goods continued to grow at a robust pace, albeit slightly slower than last month.
• The expansion in services activity was led by international orders, where firms recorded stronger sales to clients across the world. The total order book, which includes manufactured products, also rose in April.

# 5 PE / VC

5.1 As per KPMG Private Enterprise Venture Pulse Report released last week,

• VC investment in India doubled sequentially in the March quarter, touching $3.2 billion across 354 deals, vs 313 deals worth $ 1.6 bn in Dec quarter.
• Fintech continued to attract investor attention in India though marked by smaller deal sizes with key transactions such as SK Finance ($160 million), and Perfios ($80 million).
• Globally, VC investments fell to $75.9 billion across 7,520 deals in Q1 2024 amid concerns over geopolitical tensions, limited exit opportunities, and reduced investments in later deal stages.
• 10 of the world’s new unicorn companies in Q1 2024 were AI-focused startups, with the US leading with more than half of the new unicorns.
• The quarter, however, saw reduced global exit activity to $30.7 billion from $49.8 billion in Q4 2023,

5.2 As per Global Data, released last week,

• Indian startups raised $2.3 billion in VC funding during Q1CY24 vs $ 2.4 billion in Q1CY23.
• Deal volume also slipped 2 per cent to 288 deals during Q124, down from 294 in Q1CY23