>Six ways to invest in gold

Gold recently crossed its Rs 30,000 per 10 gm mark . This is a historic moment and I am sure a lot of people want to get into gold investments for their own set of reasons. But given there are so many ways to invest in gold these days, most of the people are stuck with so much of choices . More than the price , the bigger deterrent the confusion of “best option” to invest in gold.


In this article we will see what are different ways to invest in gold and and what are the pros and cons of all the options. The main focus of this article is to make the options more clear to you and help you take decisions.

1. Physical gold

The oldest and most widely used way to invest in gold is in the form of physical gold. I would say this is form with which most of the people are comfortable with . From centuries, physical gold is the only way to invest in gold . Now coming to the point , there are two ways to invest in physical gold

a) Jewellery – This is the most famous way of investing in physical gold. This is mostly done for consumption rather than “investment” .  Obviously jewellery is also an investment product in itself , but most of the people buy it for consumption purpose. The best part of Jewellery is that its very easy to invest in it , all you need to do is cash or cheque and that’s all , you can buy it . Also the whole family is more comfortable with this option. However the sad part is that you do not just pay the market price of gold , but also making charges for jewellery . As its in physical form , there are chances of theft also . One more problem with jewellery is that there are chances of fraud at times , you can be sold a inferior quality of gold in the name of “high quality” gold. So its very important from where you buy it.

When should you buy ?

Its advisable that if there is some marriage going to be there in your house in near future, you can invest in physical gold . Also note that you are very clear that it will not be required for emergency in short term. It might also be a possibility that you are more attached to physical things and do not believe in online option , that’s another reason you can go for it.

b) Gold Bar/Coin

Gold Bar and Coins are another good way to invest in physical form of gold. Gold bar/coins are sold by all the banks and jewelers . Its a good way to invest in gold if you want to do it for pure investment purpose or for some distant future marriage like your sister or daughter marriage. The good point about bars/coins is that depending on the requirement you can either buy more (bars) or less (coins) and easily available at Banks and jewellery shops , but banks only sell it , do not buy it back. Also generally there is no consumption done on regular basis so a person can keep it in locker or some safe place for long time. The bad part of gold bar/coins are that its always available at a premium price of 5-10% and at the time of selling them , you again will get a discounted price of 5-10% , so overall your returns will go down .

When should you buy ? 

You can buy a gold bar/coin if you are too attached to physical gold and can not go for online option . You can buy it for investment purpose also , but note that returns would be compromised because of the discounted price you get at the time of selling and at the time of buying . In case you have some marriage at home in coming future (not very near) , then also you can buy it . 

2. Gold ETF

Gold ETF’s are just like stocks , you can invest in these if you have a demat account . An ETF a online version of physical gold . The best of gold etf is that its convenient to invest in Gold ETF if you already have a demat account and can start with a small amount (1 gm value) and as and when you want you can invest from time to time. However the sad part is that you have to pay the brokerage and you do not get a feel of gold in your hands which you get with physical gold . The gold ETF can also be illiquid at times if you have not chosen the right one . Also there are high chances that you will sell your gold ETF in the time of small emergencies which you will not do with physical gold. Gold BeeS from Benchmark and Kotak Gold ETF are one of the biggest gold ETF’s in India right now and they are highly liquid. We recommend Gold ETF’s to our Financial Planning clients as their expectation is liquidity + some exposure to gold for investment point.

When should you buy ? 

You should buy gold ETF if you already have a demat account and would like to invest from pure investment perspective , You can consider them as liquid as you can sell them on any day in the stock market . 

3. Gold Fund of Funds

Gold Mutual funds are those mutual funds which invest in another parent mutual fund which finally invests in stocks of gold mining companies and companies which are related to gold related activities . They also buy physical gold , but in very small quantities . This is not the suitable investment for those who want to track gold prices , because these funds do not invest most of their money in gold , but gold related companies . So its mainly a equity fund which invests in companies. For example AIG World Gold Fund , which does nothing but invests in its parent mutual fund AIG PB Equity Fund Gold, which finally invests in different companies . The good part of these funds is that if you are optimistic about the future of those companies involved in gold, these are good funds , but the sad part is that you will pay expense ratio two times because it is fund of funds. A lot of people invest in these funds by mistake thinking that they invest in real gold.

When should you buy ? 

By now you will be very clear that these are actually like a sectoral fund which invests in only those companies which have their work in gold related things like mining gold etc. So its extremely risky or rewarding . So if your criteria is to invest in gold companies and not gold , these are the funds to invest in 

4. Gold Saving Funds

These are the mutual funds which invests in real gold . They pool in money from people and buy gold and you can buy the units of these mutual funds . The best part of these funds is that you can systematically invest in gold per month through SIP route . The best part of this is that you dont need to have a demat account to invest in gold saving funds . You also can invest regularly in gold through SIP through this funds.  But the sad part is that you pay administrative charges and expense ratio just like any other mutual funds.

When should you buy ? 

This is really a great way to invest in Gold if you do not have a demat account and would like to regularly invest on monthly basis . This is highly liquid option also because you can anytime sell the gold fund units like any other mutual funds unit . 

5. e-Gold

e-Gold was launched some time back in India from the exchange called NSEL , which also has other commodities like Silver and Platinum in e-format . Its very much like Gold ETF , where you can invest in Gold in online format . For investing in E-Gold you still need a demat account, but with one of the companies authorised by NSEL . The best part of this option is that you can also take physical delivery of gold with some terms and conditions. But the sad part is that not all big broking houses demat account can be used to buy this, you need to open another demat account for this and this option is not too much popular with retail investors .

When should you buy it ? 

You can buy this if you need physical delivery of gold at some future point of view , but you also want to benefit from the online advantages like the market price and no storage cost at your side. Read more about this in detail here

6. Gold  Futures

One more option to invest Gold is through Gold Futures, but I would like to call it more of a trading activity and not “investment” because its short term in nature. You can use Gold Future to protect the pricing . If the price of gold today is Rs 30,000 and a 3 month gold future price is 30,500 , then you can lock the price at this moment to 30,500 , so that when you want to buy the gold after 3 months, you get it at 30,500 only . This would require a little bit of knowledge on how future’s work .

When should you buy ?

This option is bit more technical and one should only use it if you have decent amount of knowledge . Do this if you want to lock the price of gold which you want to buy in future, if you fear that prices can go very high . 

>Know the right cost for calculating tax on rights shares

There are times when companies issue rights shares for their shareholders and this needs to be considered closely for the purpose of the calculation of the capital gains or loss that is earned from the investment. This is possible only when the right cost is allocated to the different purchases made under different conditions as will give rise to varying situations. Here are some of the variations that will be faced by the individual and how they can tackle the position.

Rights issue:There are rights issue made by companies whereby they offer the investors additional shares usually at a lower price than the prevailing market price. The new shares are offered in a specific ratio based on the existing shares that are held in the company.  In such a situation the investor is eligible to make the additional investment and they will then have an expanded holding in the form of the initial shares as well as the additional rights shares.  When these shares are sold the question that arises is with respect to the cost that will have to be taken into consideration for the purpose of determining the exact amount of capital gains that are earned in the process. This is not very difficult to understand but what is needs is clarity on the exact situation and how different amounts are allocated for this purpose.

Cost of shares:There are three possible conditions that the investor will face when they are offered the rights shares depending on whether they subscribe to the shares or not and if they choose to renounce the shares. If the answer is yes then there are two elements that will determine the cost for the individual. The first part covers the initial shares that were bought and the cost price for these shares constitutes the amount that they will consider in the tax workings. For the purpose of the calculation of the cost for the new shares the amount that is actually paid under the rights issue for this purpose would be considered as the cost for the right shares. This part of the working is simple to understand.

If the investor does not subscribe to the rights shares and they hold only the original shares then the cost for this original purchase will remain the cost for the individual. The differentiation of the rights shares are important in the sense that is most likely that these are offered to the investor at a lower cost and  hence this will have a lower cost element wherein the capital gains could turn out to be higher when the calculation is made. In terms of determining the nature of the capital gains the holding period for the original as well as the rights shares will have to be considered separately when they are sold.

Renouncing the shares:Another option that is also employed by the owner of the shares is to actually renounce the rights shares in favour of some other investor and the collect a fee for this purpose. When this step is actually undertaken then the amount that is received by the existing investor from the other investor would be considered as a short term capital gains and the cost of acquisition for this purpose will be taken as nil. The period of holding will be considered from the date of the offer made by the company to the date of the renouncement.

On the other side for the investor who has actually taken the renouncement offer from some other investor the cost element will work out to be slightly different. Here the amount that is paid for the purpose of the renouncement plus the amount that is actually paid to the company for the purchase of the rights shares would be considered as the total cost for the investor. 

The author can be reached at arnavpandya@hotmail.com

>COMPARISON BETWEEN ETF, Shares & Unit trust

RISH TRADER

>EXCHANGE TRADED FUNDS: How Do ETFs Generate Returns for Investors?

The price of an ETF share depends on the forces of supply and demand in the market and on the performance of the underlying index. Of course, the performance of the index is determined by the performance of each component stock.


In some ways, holding a share in an ETF is like holding a share of any company’s stock. If an investor buys a share of XYZ Company’s stock for $10 on Monday and sells when the share price rises to $20 on Wednesday, he or she has made a $10 profit. But if that investor sells on
Friday, when the price of the stock has fallen to $8, he or she will experience a $2 loss. The same holds true for ETFs.


Pricing, however, differs between mutual funds and ETFs. For a mutual fund, the price at which investors buy and sell shares is equal to the fund’s net asset value (NAV), less any commissions. The NAVs of both mutual funds and ETFs are calculated daily at the close of the markets. While investors can buy and sell mutual fund shares are any time throughout the day, all investors will receive the same transaction price (the NAV). In contrast, the price of an ETF share is continuously determined on a stock exchange. Consequently, the price at which investors buy and sell ETF shares may not necessarily equal the NAV of the portfolio of securities in the ETF. In addition, two investors selling the same ETF shares at different times on the same day may receive different prices for their shares, both of which may differ from the ETF’s new asset value. The price of an ETF share on a stock exchange is influenced by the forces of supply and demand.


For example, when investor demand for an ETF increases, the ETF’s share price will rise, perhaps exceeding the ETF’s net asset value. ETFs are structured, however, so that large differences between their share prices and their NAVs are unlikely to persist. Third parties calculate and disseminate every 15 seconds a measure often called the Interday Indicative Value (IIV), which is a real-time estimate of a fund’s NAV. When an ETF’s share price is substantially above this indicative value, institutional investors may find it profitable to deliver the appropriate basket of securities to the ETF in exchange for ETF shares. Retail investors may find it profitable to take a short position in the ETF’s shares. When an ETF’s share price is substantially below its indicative value, institutional investors may find it profitable to return ETF shares to the fund in exchange for the ETF’s basket of securities. Retail investors may find it
profitable to take a long position in the ETF’s shares. These actions by investors help keep the market-determined price of an ETF’s shares close to the NAV of its underlying portfolio.


RISH TRADER

>EXCHANGE TRADED FUNDS: Application Of ETFs

■  Efficient Trading: ETFs provide investors a convenient way to gain market exposure viz. an index that trades like a stock. In comparison to a stock, an investment in an ETF index product provides a diversified exposure to the market. Depending on the index, investors may obtain exposure to countries/ markets or sectors.


■  Equitising Cash: Investors with idle cash in their portfolios may want to invest in a product tied to a market benchmark like an index as a temporary investment before deciding which stocks to buy or waiting for the right price.


■  Managing Cash Flows: Investment managers who see regular inflows and outflows may use ETFs because of their liquidity and their ability to represent the market.


■  Diversifying Exposure: If an investor is not sure about which particular stock to buy but likes the overall sector, investing in shares tied to an index or basket of stocks provides diversified exposure and reduces stock specific risk.


■  Filling Gaps: ETFs tied to a sector or industry may be used to gain exposure to new and important sectors. Such strategies may also be used to reduce an overweight or increase an underweight sector.


■  Shorting or Hedging: Investors who have a negative view on a market segment or specific sector may want to establish a short position to capitalize on that view. ETFs may be sold short against long stock holdings as a hedge against a decline in the market or specific sector.


RISH TRADER

>WORKING OF EXCHANGE TRADED FUNDS

ETFs originate with a fund sponsor, which chooses the ETF’s target index, determines which securities will be included in the “basket” of securities, and decides how many ETF shares will be offered to investors. Say, for example, a fund sponsor wants to create an ETF that tracks the S&P 500 Index. Because of the expense involved in acquiring the basket of securities that represent the securities listed on the S&P 500—which can run into the millions of dollars—the fund sponsor typically contacts an institutional investor to obtain and deposit with the fund the basket of securities. In turn, the ETF issues to the institutional investor a “creation unit,” which typically represents between 50,000 and 100,000 ETF shares. (Note that, unlike shares in a traditional mutual fund that are purchased with cash, ETF sponsors require its investors to deposit securities with the fund.)


Each ETF share represents a stake in every company listed on the S&P 500 Index. The institutional investor that holds the creation unit (the “creation unit holder”) is then free to either keep the ETF shares or to sell all or part of them on the open market. ETF shares are listed on a number of stock exchanges (NYSE, NASDAQ, Amex, etc.) where investors can purchase them through a broker-dealer.


Like other exchange-listed securities, a retail investor who purchases an ETF can liquidate its investment by selling its ETF shares at the current price. By contrast, a creation unit is liquidated when an institutional investor returns to the ETF the specified number of shares in the creation unit; in return, the institutional investor receives a basket of securities reflecting the current composition of the ETF.



The basket of securities deposited by the institutional investor with the fund sponsor has been predetermined by the sponsor to track a particular index. When changes are made to the index (a stock is added to or dropped from the index), the fund sponsor notifies the creation unit holders that changes need to be made to the basket of securities originally deposited with the fund to ensure that the basket continues to track the composition of the index.


Dividend and Management Fees
Unless the underlying index is a total return index, ETFs pay dividends to investors on a regular basis. Dividends paid by the stocks held in the ETF are accrued and kept as cash until they are paid to the investor. The management fee is deducted from this cash on a daily basis. When the dividends of the underlying stocks are not sufficient to cover the management fee, a small portion of the underlying stocks in the ETF are liquidated to cover it.


ETFs Trade Close To NAV
The NAV (Net Asset Value) of the ETF, expressed on a per share basis, is the value of the underlying constituents of the benchmark held by the ETF, plus the accrued dividends less the accrued management fee. Although the price at which an ETF trades is subject to the same supply and demand dynamics of a normal share, the creation/redemption process described above ensures that the price trades very close to the NAV. Since ETF shares can be created or redeemed at the NAV, a material discrepancy between the trading price of the ETF and its NAV can be arbitraged away.

EXCHANGE TRADED FUNDS: Types

There are different types of ETF unlike close-ended funds can create or cancel units as investors enter or leave the fund. The size of the ETF, rather than the price, will fluctuate based on the demand and supply for the ETF. There are several ETF launched till date they can be broadly categorized as follows:



 Global ETF: There are ETFs tracking indices beyond the domestic markets. Ex specific regional funds that track fast growing markets in China and Korea.


 Fixed Income ETF: ETF tracking fixed income products. ETF in this case may declare and pay dividends.


 Commodity ETF: ETF that track commodity or commodity indices take advantage from the gains in the commodity market.


 Currency ETF: ETF tracking currency or currencies. Ex ETF- Euro Currency Trust (FXE) was introduced in Dec 2005 which trades on the NYSE. Hence investors can take exposure in Euro through this fund.

>EXCHANGE TRADED FUNDS: Advantages and Disadvantages

We believe ETFs will receive major inflows as Economic conditions improve and money flows back in to the market. Some of the features are as follows:


■ Tax Efficiency: Taxes may be one of most critical and yet overlooked factors in wealth creation over times as they can erode even the best fund’s returns. Because of their unique structure, ETFs, may serve as tax-efficient investment tool for shareholders who wish to defer capital gains until the point of sale.


■ Transparency: ETFs report their holdings on daily basis, allowing their investors to regularly see their investments that underpin each ETF share.


■ Flexibility: ETFs offer investment flexibility, allowing investors to buy and sell shares through out the day on an exchange. Investors can use ETF to implement advanced trading techniques such as purchasing on margin


■ Any time NAV: In mutual funds whenever you put your investment/redemption you will get closing NAV of that particular day but in ETF you can buy it anytime during the trading hours.


■ Low Asset Management Cost: As ETF are passive funds they don’t have to incur fund management charges, plus they are sold without intermediaries that keep total cost low.



■ International Exposure: If you would like to invest in international markets, ETF is a better way as it gives you diversification benefit in that marked & you also know much about those countries active funds. Globally there are many ETFs which focus on Indian Markets – you can check India ETF List at Onemint.


■ Dividends:ETFs may pay dividends in the same way as other companies. The dividends paid are typically based on the value of the dividends paid by the underlying stocks held by the ETF, less the operating expenses of the ETF. Investors are notified of the timing of dividend payments.


Disadvantages Of ETFs
• Broker and commission costs: ETF are traded through brokers and hence every time brokerage has to be paid which becomes costly affair if regular trades are done.


• Premiums and discounts: An ETF might trade at a discount to the underlying shares. This means that although the shares might be doing very well on the bourses, yet the ETF might be traded at less than the market value of these stocks.


RISH TRADER

>EXCHANGE TRADED FUNDS: Chronology of ETFs

They first came into existence in the USA in 1993. It took several years for them to attract public interest. But once they did, the volumes took off with a vengeance. Over the last few years more than $120 billion (as on June 2002) is invested in about 230 ETFs. About 60% of trading volumes on the American Stock Exchange are from ETFs. The most popular ETFs are QQQs (Cubes) based on the Nasdaq-100 Index, SPDRs (Spiders) based on the S&P 500 Index, iSHARES based on MSCI Indices and TRAHK (Tracks) based on the Hang Seng Index. The average daily trading volume in QQQ is around 89 million shares.


A key reason for their popularity is their convenience. Since ETFs trade and settle like a stock, there is no additional infrastructure or documentation required. By executing a single ETF transaction, an investor can obtain exposure to broad indices or sectors. For example, if an investor needs exposure to Large Cap Technology, he can obtain this exposure by purchasing the Technology Sector SPDR.

RISH TRADER

>EXCHANGE TRADED FUNDS(ETFs): Introduction

Exchange traded funds are essentially straight forward products index tracking instruments, but in the hands of skill full and professional investor they become building block of sophisticated investment strategies.


Institutional use of ETFs has grown almost exponentially in India. ETFs are tracking globally, country specific and asset specific indices, covering a variety of asset classes including commodities and high-yield equities and bonds-bringing simplicity, flexibility and cost-effectiveness in their wake.


An exchange-traded fund is an investment company that offers investors a proportionate share in a portfolio of stocks, bonds, or other securities. Like individual equity securities, ETFs are traded on a stock exchange and can be bought and sold throughout the day through a broker-dealer.


Exchange-traded funds (ETFs) are a relatively recent innovation to the investment company concept. Like more traditional mutual funds and other investment company offerings, ETFs offer investors, including those
of moderate means, the opportunity to purchase shares in a diversified pool of securities at a competitive price.


Exchange-Traded Funds (ETFs) are similar to index mutual funds but are listed and traded on exchanges similar to unit investment trusts and closed end mutual funds. Unlike mutual funds, that trade only once a day at net asset value, ETFs trade at varying prices throughout the day just like stocks.


Exchange-traded funds (ETFs) have gained a wider acceptance as financial instruments whose unique advantages over mutual funds have caught the eye of many an investor. These instruments are beneficial for Investors that find it difficult to master the tricks of the trade of analyzing and picking stocks for their portfolio. Various mutual funds provide ETF products that attempt to replicate the indices on NSE, so as to provide returns that closely correspond to the total returns of the securities represented in the index. In India ETF's available on NSE are diverse lot. Equity, Debt, Gold and International Indices ETF's are available. Most ETFs charge lower annual expenses than index mutual funds. However, as with stocks, one must pay a brokerage to buy and sell ETF units, which can be a significant drawback for those who trade frequently or invest regular sums of money.Their passive nature is a necessity: the funds rely on an arbitrage mechanism to keep the prices at which they trade roughly in line with the net asset values of their underlying portfolios. For the mechanism to work, potential arbitragers need to have full, timely knowledge of a fund's holdings.


RISH TRADER

>CORPORATE DEBT RESTRUCTURING

What and Why ??
The reorganization of a company's outstanding obligations is done by reducing the burden of debt on the company by lowering the rate paid and lengthening the time the company has to re-pay the obligation. This allows a company to increase its ability to meet the obligation. Also, some of the debt may be forgiven by creditors in exchange for equity.


The need for corporate debt restructuring arises when a company is going through financial hardship and is having difficulty meeting obligations. If the troubles pose a high risk bankruptcy, a company can negotiate with creditors to reduce such burdens and increase chances of avoiding bankruptcy. Even if creditors do not agree to the terms of the plan put forth, a court may determine that it is fair and impose such a plan on creditors.


The reorganization of outstanding obligations can be made in any one or more of the following ways:
~ Increasing the tenure of the loan
~ Reducing the rate of interest
~ One-time settlement
~ Conversion of debt into equity
~ Converting the unserviced portion of interest into a term loan

Borrowers’ and Lenders’ Perspectives

Borrowers’ Perspective
When a company has outstanding debts which cannot be serviced under its existing operations it can resort to any of the following courses of action:


■ Enhance its quantum of debt. expecting to increase profitability and thus pay off its original debt; However, the company may not be able sustain such a higher level of debt
■ Cease current operations and wind up. This would ultimately lead to the death of the company
■ “To consider a structured plan to re-negotiate the terms of its current debt with the lenders”


Lenders’ Perspective
CDR provides lenders with the opportunity to avoid being encumbered with non-performing assets.
■ The primary interest of lenders always lies in recovering the principal lent to a company along with returns on that investment – not to liquidate assets
■ Apart from this, liquidation proceedings are notorious for yielding low returns to creditors Therefore, CDR becomes an instrument for lenders, i.e. banks, to aid the transformation of otherwise non-performing assets into productive ones

CDR Analysis

Whether a case should be referred for restructuring or not is based upon a thorough examination of facts and the viability of a case. However, when the demand for restructuring is legitimate, and there is a good reason to believe that a company may be revived, it must be considered for restructuring.


A Corporate Debt Restructuring mechanism was first introduced in 2001. CDR is a voluntary, nonstatutory system that allows a financially troubled company with multiple lenders and loans of more than Rs.20 crore to restructure those loans to a plan approved by 75% or more of its lenders.


On December 31, 2011, of the 364 cases worth Rs.1.84 lakh crore referred to the CDR Cell, 230 have been approved or resolved. That's over Rs.1.42 lakh crore of debt restructured under the CDR mechanism.


Sectors more prone to CDR
Iron & Steel, Textiles, Telecoms, Fertilizers, Sugar, Cement, Petrochemicals & Refineries
New Sectors emerging for CDR
Infrastructure and NBFCs



Instances of CDR
Subhiksha Retail Bharti Shipyard
Vishal Retail ICSA
GTL Infra SuzlonEnergy
Air India GTL Ltd.
Wockhardt Kopran
India cements Koutons Retail
Jindal Steel Kingfisher Airlines
Essar Steel Nicco Corporation
HPL Rajasthan State Electricity Board
Maytas Infra Basix
Spandana Sphoorty ARSS INFRA
HCC Surya Pharma
Jindal Stainless Essar Steel



Companies struggling with high debt
Everyone agrees that India needs infrastructure such as roads and utilities and such companies are better positioned because of their experience. But the debt they have accumulated over the years is an albatross around their necks.


When the infrastructure fad was running its course, companies more than tripled their debt, bidding for projects much bigger than what their equity could support. Indiscriminate lending by banks, prodded by the government, is back to haunt these companies as most lenders have hit their limits and are staring at defaults.


A few recent reports highlighted more than two dozen highly-leveraged large borrowers, including Adani Power, Essar Oil, Tata Communications, Electrotherm India and Jai Balaji, many of which may require future debt-restructuring.


Lanco, a power producer and contractor, recently defaulted on a Rs.90-crore payment to banks. In the five years between 2007 and 2011, the debt of GMR Infra, which operates the New Delhi airport, jumped 6.7 times. BGR Energy and IVRCL, a contractor for road and water projects, had a 5.4-fold jump in its debt. GVK Power, which runs the Mumbai airport, saw its debt climb 3.59 times in the same period. Jaypee Infratech, which built India's only Formula 1 race track in a New Delhi suburb, had its debt soar 31 times in three years from Rs.200 crore in fiscal 2008. Hotel Leela Venture increased its debt almost four times from 2007.
Many are headed for debt restructuring where lenders may impose strict conditions and dilute equity. That could hurt stockholders' interests.



Ultimately, the lender is the worst affected
A report from Standard & Poor’s talked about Indian bank’s weaker asset quality and earnings across the sector in 2012, with credit growth predicted to fall to 16%, from 23% the year before.


India’s banks weakening asset quality is also clear from the marked rise in debt restructuring agreements, a halfway house between payment and default used by the banks for struggling businesses such as Kingfisher Airlines. Taken together, HCC’s mix of bad and restructured loans rose to 4.3% of overall lending in the third quarter, up from 25 in the same period last year.


Corporate debt has spiked by over 300% this fiscal, already touching Rs.76,251 Crores, against Rs.25,054 crore in the previous fiscal. This brings the overall CDR assets in the system to over Rs.1.9 lakh crore. This is alarming.


Credit rating agency Standard & Poor’s, in a recent conference call with the media, said that restructured loans were expected to increase to around 4% of advances (of the banking system) at this financial year-end, from 2.6% a year ago. In 2012-13, restructured loans are expected to be 4-5% of advances. The S&P analyst also said that 25-50% of restructured loans may slip into NPAs.


In the April-June quarter of 2011-12, the cell received 16 corporate restructuring cases with debt of Rs.4,682 crore. In the July-September quarter, it received 19 cases (with debt of Rs.23,071 crore); in the October-December quarter, 25 cases (Rs 22,497 crore); and in the January-March quarter, 23 cases (Rs 26,001 crore). Corporate sickness seems to be spreading. Earlier, an average bank would have not more than 3-4 corporate
debt restructuring cases at a time. But now an average bank deals with about 30 cases.


Current Trend

Surprisingly, the SBI and the HDFC Bank, two of the country’s largest lenders, have undertaken relatively little restructuring this financial year, than other banks. But private lenders are better off than PSUs in terms of NPAs as well as regarding debt restructuring.