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www.brickworkratings.com September 2020 1 September 2020 BWR DRISHTIKONE www.brickworkratings.com
Transcript of DRISHTIKONE - brickworkratings.com 2020.pdfDrishtikone issue of further stimulus measures, such as...
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September 2020 1
September 2020
BWR DRISHTIKONE
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September 2020 2
Uncertainty over Economic Recovery Intensifies
August 2020
Disappointing GDP Numbers
The first quarter GDP estimates released on 31 August by the Ministry of Statistics
and Programme Implementation are clearly disappointing, although not entirely
unexpected. The GDP contraction during the quarter was 23.9%, and the GVA shrunk
by 22.8%. The strict lockdown implemented in the last week of March that continued
until end-May has brought the economy to a grinding halt for the major part of the
quarter. Even as lockdown relaxations have been slow and staggered, most
metropolitan and large urban centres continue to be severely constrained in terms
of economic activities. The lockdown brought with it both supply disruptions and
demand compression, and it was clear that revival in the economy is possible only
with the lifting of restrictions. The lockdown had its impact on data collections as
well, and the estimates released now are mainly based on information received from
the organised sector, and the GDP from the unorganised sector was estimated using
benchmarks. Therefore, the estimate could undergo substantial downward revisions
when more and better information becomes available as the impact of the pandemic
has been severe in the unorganised sector.
The sector-wise breakup of the first quarter estimate shows that the only sector with
positive growth during the quarter was agriculture, forestry and fishing. The
construction sector was the worst hit, with a contraction of over 50%, followed by
trade, hotels, transport, communication, and services related to broadcasting
contracting at 47%. The contraction in manufacturing was 39.4%. Even public
administration, defence and other services that generally show high growth have
contracted by over 10%. The estimates also show that all growth engines have
stuttered. The sharpest decline in the GDP share was in the gross fixed capital
formation from to 32% a year ago to 22.3% now in constant prices and from 28.9%
to 19.5% in current prices. The only increase was seen in government consumption
expenditure from 12.3% in the first quarter of last year to 19.1% in the first quarter
in constant prices and 11.8% to 18.1% in current prices, and going further, that too
is likely to become slower due to compressed fiscal space unless the government
comes up with a large fiscal stimulus package.
The sectoral growth pattern described above also indicates that the prospect of a
quick turnaround does not look bright as most metropolitan areas, which are the
growth centres, continue to be under partial lockdowns, and some activities are yet
to be opened up for business. In addition, supply disruptions and migrant labour
problems continue to constrain economic activities. Transport, tourism and
hospitality will take a long time to revive. Three balance sheet crises are stalling
IN THIS ISSUE…
Macro Indicators
Economy Trends
Core Industries and IIP
Inflation and Repo Rate
Crude Oil and INR/USD
Merchandise Trade
Forex Reserves
Government Accounts
Sectoral Indicators
Banking
Steel
Automobiles
Telecom
Power
Debt Market Indicators
Movement in Bond Yields
Yield curve
External Commercial Borrowings
Contacts
Dr M Govinda Rao
Chief Economic Advisor
+91 8040409940
Rajat Bahl
Chief Ratings Officer
+91 22 67456634
Anita Shetty
Research Editor
+91 22 67456633
Ria Matwani
Research Editor
+91 22 67456675
Praveen Pardeshi
Research Analyst
+91 22 67456681
Investor and Media Relations
+9184339 94686
www.brickworkratings.com
September 2020 3
investment activity. The balance sheets of corporates are under severe strain and
they have postponed their plans to invest; the SMEs are struggling to survive. The
NPAs in commercial banks are set to rise sharply after the moratorium and
restructuring period end, and not surprisingly, they have turned risk averse and
unwilling to lend. Besides, many public sector banks are preoccupied with adapting
to mergers and are simply not thinking about the business. Thus, borrowers are
unwilling to borrow, and lenders are unwilling to lend. While the government could
have spent its way out to trigger economic revival, it simply does not have the fiscal
space. For all these reasons, revival may not be swift, and even after the pandemic
ends and normalcy settles in, growth during the new normal would be much lower
than the average of 7% experienced in the last two decades.
The financial sector will witness severe stress with the extension of the moratorium
and restructuring being planned. In fact, those who repaid their loans in spite of
difficulties must be rueing their decisions. Once the moratorium is lifted, the real
magnitude of the problem will be known, and the skeletons will tumble. According to
the stress test conducted by the RBI, the NPA of scheduled commercial banks could
rise from 8.5% in March 2020 to 12.5% under a baseline scenario and 14.7% under a
very severe stress scenario. The NPA of public sector banks is stated to rise from
11.3% in March 2020 to 15.2% under a baseline scenario and 16.3% under very
severe stress.
The only way to counter the bleak prospects and fast track reforms is to frontload
the reforms. It is often said that a crisis is the mother of reforms, and the prevailing
crisis is grave enough for the government to activate them. This is the time to
implement the Nayak Committee report of reducing the shareholding of the
government in public sector banks and empowering the boards to improve
governance in them. The proceeds of selling the shares of the banks can be used for
their recapitalisation. This is also the time to undertake a massive disinvestment
programme and use the proceeds to make investments in infrastructure to trigger
demand revival. The defence sector has been starved of funds for long, and the
present standoff with the northern neighbour has brought out an urgent need to
augment supplies to ensure safety and security, which is the basic public good the
government has to provide. To this end, the government should monetise the large
volume of the defence department’s assets, including land to meet requirements.
Many states, constrained with a severe resource crunch, are in the process of
undertaking a number of reforms, including encashing their assets (in particular,
land and residential plots in urban areas). There are other reforms needed to free
land and labour from inflexibilities to provide a viable alternative to entrepreneurs
who want to relocate from China. The most important reforms needed in the country
today are judicial reforms to ensure that the basic duty of the state, of enforcing
contracts in a timely manner, is conducted; this is the most important factor in the
ease of doing business.
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September 2020 4
Annexure: Select Macro Economic and Sectoral Indicators
Indicators/ Sectors 2017-
18
2018-
19
2019-
20
Jul
2019
Aug
2019
Sep
2019
Oct
2019
Nov
2019
Dec
2019
Jan
2020
Feb-
2020
Mar-
2020
Apr-
2020
May-
2020
Jun-
2020
Jul-
2020
Aug-
2020
Economy GDP at 2011-12 Prices Y-o-Y in % 7.04 6.12 4.18 4.42 4.08 3.09 -23.92 - -
GVA at 2011-12 Prices Y-o-Y in % 6.59 6.04 3.89 4.33 3.47 3.04 -22.81 - -
Agriculture Y-o-Y in % 5.93 2.41 4.05 3.51 3.60 5.87 3.37 - -
Industry Y-o-Y in % 6.35 4.88 0.92 0.50 -0.31 -0.58 -38.08 - -
Services Y-o-Y in % 6.92 7.74 5.55 6.52 5.67 4.44 -20.64 - -
Banking
Gross Bank Credit Y-o-Y in % 8.37 13.29 6.13 12.12 10.24 8.74 8.93 7.25 6.97 8.50 7.30 7.60 7.40 7.00 6.90 - -
Bank Credit to Industries Y-o-Y in % 0.73 6.91 1.40 6.12 3.87 2.71 3.36 2.36 1.64 2.48 0.70 1.40 1.70 1.70 2.20 - -
Deposit Y-o-Y in % 6.20 10.04 7.90 9.57 9.73 9.38 10.25 9.52 9.66 9.80 9.00 7.90 9.80 10.50 11.00 - -
Industry
Manufacturing PMI Index 51.60 52.80 52.33 52.50 51.40 51.40 50.60 51.20 52.70 55.30 54.50 51.80 27.40 30.80 47.40 46.00 52.00
IIP Y-o-Y in % 4.40 3.80 -0.70 4.90 -1.40 -4.60 -6.60 2.10 0.40 2.20 5.20 -18.70 -57.30 -33.90 -15.80 -10.40 -
Manufacturing Y-o-Y in % 4.60 3.90 -1.30 4.80 -1.70 -4.30 -5.70 3.00 -0.30 1.80 3.80 -22.80 -66.60 -38.40 -16.00 -11.10 -
Consumer Durables Y-o-Y in % 0.80 5.50 -8.70 -2.40 -9.70 -10.50 -18.90 -1.40 -5.60 -3.70 -6.20 -36.80 -95.70 -69.40 -34.30 -23.60 -
Consumer Non-Durables Y-o-Y in % 10.60 4.00 -0.10 8.50 3.10 -1.10 -3.30 1.10 -3.20 -0.60 -0.30 -22.30 -48.10 -11.10 14.30 6.70 -
Eight Core Y-o-Y in % 4.28 4.37 0.40 2.64 -0.19 -5.12 -5.49 0.70 3.10 2.20 6.40 -8.56 -37.86 -21.98 -12.91 -9.60 -
Auto Sales Y-o-Y in % 14.30 5.10 -17.95 -18.67 -23.51 -22.39 -12.73 -12.02 -13.10 -13.80 -19.10 -45.00 -100.00 -85.00 -43.00 -19.10 -1.70
Passenger Vehicles Y-o-Y in % 7.90 2.70 -17.82 -30.96 -31.57 -23.68 0.29 -0.83 -1.20 -6.20 -7.60 -51.10 -100.00 -86.00 -53.20 -9.00 9.80
Commercial Vehicles Y-o-Y in % 20.00 17.60 -28.74 -25.66 -38.71 -39.06 -23.36 -14.98 -12.30 -14.00 -32.90 -88.10 -100.00 -100.00 -100.00 -100.00 -100.00
Two & three Wheelers Y-o-Y in % 15.10 5.00 -17.47 -16.48 -21.71 -21.49 -14.03 -13.64 -15.30 -15.10 -20.20 -40.60 -100.00 -84.10 -39.80 -17.40 0.10
Power Generation Y-o-Y in % 5.40 3.60 - 5.67 -0.25 -3.72 -13.40 -6.80 -1.90 2.40 10.00 -9.00 -25.00 -18.00 -9.00 -1.00
Steel Consumption Y-o-Y in % 7.90 8.80 0.72 8.45 4.52 -4.23 2.90 2.68 1.70 3.60 -6.40 -29.40 -85.30 -47.50 -30.70 -18.40 -14.00
Cement Consumption Y-o-Y in % 6.60 13.90 - 7.83 -5.58 -2.17 -8.07 4.21 5.50 5.00 8.60 -22.70 - - - - -
Domestic Passengers carried by Airlines
Y-o-Y in % 18.00 13.70 0.71 3.01 3.87 1.18 3.98 11.18 2.60 2.20 9.00 -33.00 -100.00 -98.00 -84.00 -82.00 -
External Sector
Exports USD Bn 29.32 32.72 21.41 24.11 27.60 24.10 25.61 28.73 27.07 31.62 28.75 32.18 27.21 15.43 23.24 22.94 21.79
Imports USD Bn 42.82 43.72 31.16 17.57 12.41 14.04 18.91 26.60 23.02 12.18 21.91 12.24 0.06 2.17 12.29 27.33 57.66
Exchange Rate (Average) INR per
USD 65.02 69.48 75.39 68.81 71.15 71.33 71.04 71.45 71.19 71.31 71.49 74.35 76.24 75.66 75.72 74.99 74.67
Crude Oil (Average) USD per barrel
56.43 69.88 60.47 63.63 59.35 61.73 59.70 62.54 65.50 64.31 54.63 33.36 19.90 30.60 40.63 43.35 44.19
Forex Reserves USD Bn 424.54 412.87 477.81 428.82 428.35 433.71 445.11 451.26 459.86 471.30 481.26 477.81 481.08 493.56 505.70 534.63 541.43
Inflation
CPI Y-o-Y in % 4.28 2.86 4.77 3.15 3.28 3.99 4.62 5.54 7.35 7.59 6.58 5.91 - - 6.09 6.73 6.69
Core Y-o-Y in % 5.22 5.05 4.04 4.28 4.24 3.99 3.46 3.54 3.82 4.16 4.02 4.03 - - 4.80 5.50 5.80
WPI Y-o-Y in % 2.74 3.10 1.69 1.17 1.17 0.33 0.00 0.58 2.59 3.10 2.26 1.00 -1.57 -3.37 -1.81 -0.58 0.16
Food Y-o-Y in % 0.00 3.59 6.92 4.90 5.90 6.12 7.65 9.09 11.05 10.12 7.31 5.49 4.38 2.73 3.12 4.32 4.07
Interest Rates
Repo Average Rate
6.00 6.25 4.40 5.75 5.40 5.40 5.15 5.15 5.15 5.15 5.20 4.40 4.40 4.00 4.00 4.00 4.00
10-year Benchmark Average Rate
7.84 7.47 6.80 6.75 6.81 6.97 6.65 6.76 6.89 6.98 6.80 6.80 6.80 6.00 6.00 5.90 6.10
10- year AAA Corporate Bond
Average Rate
8.75 8.55 7.60 8.08 7.81 8.02 7.93 7.88 7.90 7.97 7.60 7.60 7.90 7.30 6.90 6.60 6.90
5- year Benchmark Average Rate
7.79 7.07 6.20 6.51 6.52 6.64 6.54 6.52 6.77 6.66 6.30 6.20 6.10 5.60 5.60 5.10 5.40
5- year AAA Corporate Bond
Average Rate
8.35 8.19 7.30 7.70 7.55 7.59 7.35 7.55 7.35 7.38 7.00 7.30 7.40 6.90 6.20 5.70 5.90
MCLR of SBI (1 year) Average Rate
8.15 8.55 7.80 8.40 8.25 8.15 8.05 8.00 7.90 7.90 7.90 7.80 7.40 7.30 7.00 7.00 7.00
Call Money Average Rate
5.91 6.21 4.90 5.58 5.37 5.30 5.04 4.95 4.99 4.90 4.90 4.90 4.20 3.80 3.60 3.50 3.40
Notes: Data is provisional for the latest months and annual growth rates are average for the full fiscal, -: Not available, *: At the end of the period.
Source: MOSPI, RBI, eaindustry.nic.in, IHSmarkits.com, SBI, CMIE, FIMMDA, BWR Research
www.brickworkratings.com
September 2020 5
MACRO-ECONOMIC INDICATORS
Economy Trends
The contraction in the GDP during Q1FY21 by 23.9% and GVA by 22.8% clearly explains the
impact of the strict lockdown that disrupted economic activities in the major part of the
quarter. Rural economy is relatively less impacted due to COVID-19, and hence, except
agriculture, all other sectors of the economy contracted in the first quarter. The majority of
industrial sector establishments started operating in the second part of the first quarter;
however, continued social distancing measures amid demand and supply disruptions kept the
rate of resumption in economic activities slower.
* Provisional Estimates by MOSPI, Source: MOSPI, BWR Research
Reflecting improved business conditions in the manufacturing sector, the manufacturing PMI
moved above 50 points in August after a gap of four months. The pace of contraction declined
in the eight core sectors’ production and IIP as well, compared with previous months.
Moreover, consumer durables reported positive growth in June (14.3%) and July (6.7%), though
this could be attributed to pent up demand.
Source: MOSPI, eaindustry.nic.in, IHS Markit, BWR Research
BWR Views
Although the lockdown has
been relaxed in phases,
economic activities continued
to remain subdued in the
second quarter as well. We see
manufacturing activity gaining
pace slowly, with a resurgence
in some early indicators such
as the PMI. We expect
economy to continue to
contract in the Q2 FY21, but at
a slower pace at -13.5%,
compared to 23.9%
contraction estimated for Q1.
Demand and supply
compression amid continued
social distancing measures is
likely to maintain subdued
economic activities, and the
surge in Covid positive cases
may derail the recovery
process. We expect that some
recovery may begin from the
December quarter if the
pandemic situation subsides.
With a dismal first quarter
performance, and elongated
uncertainty over the pandemic
peak, we have revised
downwards our GDP estimate
for 2020-21 to -9.5%, from the
earlier estimate of -5.5%.
8.27.1 6.2 5.6 5.7 5.2 4.4 4.1 3.1
-23.9-25.0
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
Mar
-18
Jun
-18
Sep
-18
Dec
-18
Mar
-19
Jun
-19
Sep
-19
Dec
-19
Mar
-20
Jun
-20
Y-o- Y growth in India's Quarterly GDP (%)
52.0
20
25
30
35
40
45
50
55
60
-80.0
-70.0
-60.0
-50.0
-40.0
-30.0
-20.0
-10.0
0.0
10.0
Jul-
19
Au
g-1
9
Sep
-19
Oct
-19
No
v-1
9
Dec
-19
Jan
-20
Feb
-20
Mar
-20
Ap
r-2
0
May
-20
Jun
-20
Jul-
20
Au
g-2
0
Indicators of Industrial Performance (yoy in %)
Manufacturing PMI (Right Axis) Manufacturing in IIPIIP Eight Core Industries
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September 2020 6
Inflation and Monetary Policy Action
CPI inflation softened to 6.69% in August from 6.73% in July (revised from 6.93% estimated
earlier) due to easing food inflation. However, the current level of inflation is still above the
monetary policy framework of the RBI, leaving slight chances of a rate cut in the upcoming
policy review. Moreover, rising core inflation, which was increased to 5.8% in August from 5.5%
in the previous month, adds further concerns. The RBI kept the repo rate unchanged due to
inflationary worries in the last two policy meetings.
Source: Ministry and Programme Implementation (MOSPI), RBI, BWR Research
Merchandise Trade
With the easing of the lockdown, India’s merchandise trade reported some recovery with
gradual decline in the pace of contraction in both imports and exports. However, the
contraction continued for the sixth straight month in August 2020, with exports shrinking by
12.7% and imports by 26% over the corresponding period of the previous year. Trade deficit
widened in August from July, but compared to last year, it narrowed sharply.
Source: Ministry of Commerce, BWR Research
BWR Views
A gradual rebound in global
trade helped improve exports,
but the continued partial
lockdown situation in the
major parts of the country
slowed down the recovery
process. Oil prices at below
USD 45 per barrel continue to
provide some respite on the
import bill and help trade
balance to remain low.
4.0
6.69
5.80
9.05
3.00
3.50
4.00
4.50
5.00
5.50
6.00
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0A
ug-
19
Sep
-19
Oct
-19
No
v-1
9
Dec
-19
Jan
-20
Feb
-20
Mar
-20
Ap
r-2
0
May
-20
Jun
-20
Jul-
20
Au
g-2
0
Y-o-Y CPI Inflation and Repo Rate (in %)
Repo Rate (RHS) CPI Inflation Core Inflation Food Inflation
-12.7%
-26.0%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
-16000
-14000
-12000
-10000
-8000
-6000
-4000
-2000
0
2000
Au
g-1
9
Sep
-19
Oct
-19
No
v-1
9
Dec
-19
Jan
-20
Feb
-20
Mar
-20
Ap
r-2
0
May
-20
Jun
-20
Jul-
20
Au
g-2
0
India's Merchandise Trade Balance (USD mn)
Trade Balance (LHS) Exports (y-o-y) Imports (y-o-y)
BWR Views
The current level of high
inflation is largely due to
supply-side constrains. As
restrictions in the economy are
progressively relaxed, capacity
utilisation will improve, and
supply constraints will ease to
stabilise both output and
prices.
We expect food inflation to
ease further in the coming
months, with the arrival of new
harvests and availability of a
sufficient stock of pulses and
food grains. Stable crude oil
prices will likely keep fuel
inflation under control.
However, the spill overs of the
increase in taxes, and petrol
and diesel prices, are likely to
exert inflationary pressures in
services items.
BWR expects CPI inflation to
soften to 6-6.5% between
September and December
2020.
www.brickworkratings.com
September 2020 7
Forex Reserves and Import Cover
Foreign exchange reserves increased further and crossed USD 541 billion as on 28 August
2020, rising by USD 6.8 billion over 31 July 2020. Buoyant portfolio inflows (USD 6.6 billion in
August) and lower current account deficit resulted in this consistent rise, in addition to an
increase in the gold prices. However, the slight fall in the prices of gold, in August which
accounts for ~7% of the total reserves, erased some of the rise witnessed in the recent months.
Source: Ministry of Commerce, RBI, BWR Research
Crude Oil Prices and INR/USD Rates
Oil prices remained range-bound in August, reflecting sluggish demand globally as the
pandemic crisis continues. The Indian basket of crude oil remained steady at around last
month’s level of ~ USD 44 per barrel in August. On the other hand, lower oil prices, lower
imports and higher FPI inflows helped the rupee to appreciate significantly during the month.
Note: The Indian basket of crude oil represents a derived basket consisting of Sour grade
(Oman and Dubai average) and Sweet grade (Brent dated) of crude oil processed in Indian
refineries)
Source: Ministry of Petroleum & Natural Gas, FBIL, BWR Research
BWR Views
Forex reserves provide huge
resilience to the external
sector position, and current
level of abundant forex
reserves, gives much-needed
comfort to absorb external
shocks, and help the RBI to
intervene in the forex market
whenever required.
BWR Views
The outlook for oil prices
remains lower. If oil prices
remain at the current level for
long, it will provide the much-
needed fiscal and monetary
space with a lower import bill.
541
6.0
11.0
16.0
21.0
26.0
31.0
300
350
400
450
500
550
600
Jul-
19
Au
g-1
9
Sep
-19
Oct
-19
No
v-1
9
Dec
-19
Jan
-20
Feb
-20
Mar
-20
Ap
r-2
0
May
-20
Jun
-20
Jul-
20
Au
g-2
0
Forex Reserves and Import Cover
Foreign Exchange Reserves (USD bn) Import Cover in months (RHS)
44.2
74.7
68.0
69.0
70.0
71.0
72.0
73.0
74.0
75.0
76.0
77.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Au
g-1
9
Sep
-19
Oct
-19
No
v-1
9
Dec
-19
Jan
-20
Feb
-20
Mar
-20
Ap
r-2
0
May
-20
Jun
-20
Jul-
20
Au
g-2
0
Cru
de
Oil
Pri
ces
in $
Bar
rel
Crude oil Prices and Rs per US Dollar
Crude oil (Indian Basket) Rs/$ (RHS)
www.brickworkratings.com
September 2020 8
Government Finances
Disrupted economic activities, since the lockdown was imposed in March, continued to impact
the revenue collections of both centre and states. As per the latest data (provisional) available,
the central government’s revenue in the first four months of 2020-21 was much lower than
revenue collections in the corresponding period last year. Furthermore, there is a sharp surge
in expenditure during the same review period due to additional spending. Increased
expenditure through stimulus measures and an acute shortage of revenue are likely to keep
government accounts under pressure as fiscal deficit has already crossed 103% of the budget
estimates (BE) in the April to July period.
Note: Data is provisional, Source: Controller General of Accounts (CGA), BWR Research
Revenue Collection through Goods and Services Tax (GST)
The GST revenue collection for the first five months of 2020-21 was 30% lower than the
corresponding period of 2019-20, due to Covid-19 related disruption in business activities. The
sequential recovery witnessed in the GST collected in June, compared with the previous two
months, was not sustained in the last two months, which throws light on the grave challenges’
businesses are facing currently.
Source: Ministry of Finance, BWR Research
1,139
1,003 999 1,021982
323
620
909 874 864
0
200
400
600
800
1,000
1,200
April May June July August
GST collection (Rs billion)
2019-20 2020-21
BWR Views
Lower negative growth in
monthly collections in GST
revenues depicts some
recovery in consumption and
business activity. GST monthly
collections are likely to reach
last year’s levels only after
December, assuming there is a
resumption in demand and
consumption; however, slow
progress in economic activities,
coupled with an extended
lockdown in certain states, in
addition to the rising number
of positive cases, may lead to a
delayed recovery, and we
expect GST collections to be
significantly lower than annual
budget estimates.
BWR Views
Given the expectation of a 9.5%
contraction in the economy,
tax revenue is also expected to
decline in 2020-21. The centre
has already announced it
would borrow Rs 12 lakh crore,
which is 54% more than the
budgeted amount for 2020-21,
to bridge the fiscal deficit gap.
BWR expects a sharp slippage
in fiscal deficit in 2020-21,
which may breach 7% of the
GDP from the budget target of
3.5%. We also expect that
government borrowing may
increase 60% more than BE.
22,459
2,329
30,422
10,542
(7,963) (8,213)(6,092) (7,150)
(15,000)
(10,000)
(5,000)
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2020-21 (BE) 2020-21 (April to July)
Govt Accounts: Trends in Revenue and Expenditure (Rs Bn)
Total Receipts Total Expenditure Fiscal Deficit Revenue Deficit
www.brickworkratings.com
September 2020 9
SECTORAL INDICATORS
Banking
The gross bank credit as of 31 July 2020 declined by 1.2% from March 2020. The decrease in
credit growth is improving from that witnessed in same period last year. While industry,
services and personal loans continue to degrow, there is marginal growth in credit to
agriculture.
Source: RBI, BWR Research
The RBI announced a resolution framework for COVID-19-related stress. It has constituted an
expert committee under the chairmanship of Shri K.V. Kamath to make recommendations on
the required financial parameters to be factored in the resolution plans, along with sector-
specific benchmark ranges for such parameters.
The resolution framework for COVID-19-related stress was initiated with the intent of
facilitating the revival of service sector activities and mitigating the impact of the COVID-19
pandemic on ultimate borrowers; it has decided to provide a window under the Prudential
Framework to enable lenders to implement a resolution plan in respect of eligible corporate
exposures without a change in ownership, and personal loans, while classifying such
exposures as Standard, subject to specified conditions.
The framework is applicable to eligible borrowers, subject to certain conditions, segmented in
four parts. Part A pertains to requirements specific to the resolution of personal loans and
Part B to the resolution of other eligible borrowers. Part C prescribes the prudential treatment
of the exposures in respect of which resolution plans are implemented under this facility, and
Part D lists the disclosure requirements for lending institutions with respect to the resolution
plans implemented under this framework. While the framework states of eligible borrowers,
it also specifies the borrowers not eligible for a resolution plan under this framework.
-1.3%
-0.2%
-3.0%
-4.3%
2.5%
-1.2%
1.0%
-2.9%
-1.8%
-0.9%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
Overall BankCredit
Agriculture Industry Services Retail loans
Banking - Sectoral Credit Growth
YTD July 2019 YTD July 2020
BWR Views
Incremental slippages are
likely to be seen from Q3 FY21,
and without any expectation of
recoveries, the asset quality
position of most banks will
weaken. On the one hand,
banks will face pressure to
monitor asset classification,
and they may also have to
make additional provisions,
and this is likely to impact
profitability. Under the
scenario, the extension of bank
credit will be essential in
reducing gross NPA ratios and
also build on its interest
income. With the profitability
under stress, the banks
working on a thin margin of
capital adequacy ratios will
have to raise adequate capital
to avoid any regulatory breach
on the capital adequacy ratios.
BWR views that the absence of
adequate credit growth may
raise concerns over asset
quality, profitability and capital
adequacy in the near to
medium term. The outcome
and implementation of the
Kamath committee on the
resolution framework for
COVID-19-related stress in
improving the aforesaid
concerns shall be a
monitorable.
Vydianathan Ramaswamy
(Director & Head - Financial
Sector Ratings)
Hemant Sagare
(Senior Manager - Ratings)
www.brickworkratings.com
September 2020 10
Automobiles
Domestic automobile sales recovered substantially post May 2020 due to the resumption of
business activities post the lockdown. The sales of two- and three-wheelers have seen the
steepest recovery. This improvement is largely on account of a healthy rural demand scenario.
The rural area has not been impacted much by the pandemic, and as it has its dependency on
agriculture and related activities, the livelihood of people has not been affected.
Source: CMIE, BWR Research
For full year 2019-20, overall automobile sales were down by 18%, with commercial vehicle
sales falling by nearly 30%. An increased cost of ownership, revised axle norms, financing
issues due to the NBFC crisis, the economic slowdown and subdued consumer sentiments
contributed towards weak automobile sales in FY20.
Telecom
Providing much-needed relief to the telecom sector, the Supreme Court has allowed staggered
payments of the AGR dues to telcos, albeit for a shorter duration of 10 years, compared with
the requested 15 years. Additionally, telcos have to pay 10% of pending dues by 31 March
2021, and the remaining amount can be paid over a period of 10 years between 1 April 2021
and 31 March 2021, with 7 February every year being the due date of the annual payment.
While Bharti Airtel seems to be better placed, having already paid a substantial amount of its
total dues, Vodafone Idea (VIL) requires either fund infusion from promoters or another round
of tariff hikes to ease out its liquidity position as it still owes more than Rs. 50000 crores to the
DoT as per original demand. However, a further hike in tariffs is important for the viability of
the sector as a whole. Only if the ARPUs move closer to Rs. 180-200, along with the retention
of existing subscribers, stress on telcos is expected to ease. Nonetheless, the verdict by the
Supreme Court provides some immediate respite to telcos, most of which are struggling to
remain viable. However, we do expect review petitions to be filed by telcos regarding the
judgment, seeking more relief.
-100%
-80%
-60%
-40%
-20%
0%
20%
Au
g-1
9
Sep
-19
Oct
-19
No
v-1
9
Dec
-19
Jan
-20
Feb
-20
Mar
-20
Ap
r-2
0
May
-20
Jun
-20
Jul-
20
Au
g-2
0
Automobile Sales (Growth y-o-y)
Passenger Vehicles Commercial Vehicles
Two & Three Wheelers Exports
BWR Views
The two- and three-wheeler
segment will continue to see
some traction due to healthy
demand anticipated in rural
areas owing to a normal and
well-distributed monsoon. The
preference for personal
mobility due to safety concerns
will provide some support to
two-wheelers and passenger
vehicle sales.
Vipula Sharma
(Director - Ratings)
Aakriti Sharma
(Asst Manager - Ratings)
www.brickworkratings.com
September 2020 11
Power
The power sector's situation has worsened since the lockdown was imposed, with demand
falling by more than 30%, that too from high-volume and high-paying customers (industrial
users and railways). While demand has revived to some extent post lockdown relaxations
being announced in various regions, it continues to remain lower than February levels.
Source: Central Electricity Authority, BWR Research
Thermal sector continues to suffer, with power demand still being lower than pre-COVID levels
and receivables from Discoms continuing to soar. Renewables, on the other hand, have seen
a growing trajectory on account of their must-run status and minimal operational costs. Of the
total liquidity infusion of Rs. 90,000 crore by PFC/REC, sanctions for Rs. 68,000 crore have been
made. The cabinet has also cleared the one-time relaxation proposal to fund Discoms that do
not have any buffer available in their working capital borrowings cap under UDAY, indicating
that more sanctions will happen now. However, considering the delay in the sanctions and
disbursements and continuous rise in the Discoms’ payable levels, the overall amount of Rs.
90,000 crore appears to be insufficient and may not be able to resolve liquidity issues after all.
Source: Central Electricity Authority, BWR Research
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%Ju
l-1
9
Au
g-1
9
Sep
-19
Oct
-19
No
v-1
9
Dec
-19
Jan
-20
Feb
-20
Mar
-20
Ap
r-2
0
May
-20
Jun
-20
Jul-
20
Power Generation (Growth y-o-y)
Thermal Nuclear Hydro Renewables
-1.0%
-0.2% -0.2%-0.4%
-2.6%
-1.1%-1.0%
0% 0.0% 0%
-4.6%
-0.5%
-5.0%
-4.5%
-4.0%
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
Northern Western Southern Eastern North Eastern All India
Power Supply Position - Peak (Surplus/Deficit)
Jul 2019 Jul 2020
Vipula Sharma
(Director - Ratings)
Aakriti Sharma
(Asst Manager - Ratings)
BWR Views
The revival of the power sector
requires meaningful structural
changes targeting an
improvement in the
operational efficiency, a
reduction in cross-subsidies
and cost-reflective tariffs.
www.brickworkratings.com
September 2020 12
Steel
The Coronavirus pandemic and subsequent lockdown negatively impacted already weak
demand, which was influenced by recessionary conditions for steel in the country. However,
now, the Indian steel market has started showing signs of recovery with the revival of demand
in the rural economy. We expect steel production to continue to grow at a slow pace and inch
closer to pre-COVID levels by early Q4 FY21. Although the lockdown has largely been lifted in
India, domestic steel demand remains quite fragile, which will keep pick-up in steel production
slow in the coming months.
Source: CMIE, BWR Research
An improvement in steel demand post monsoons will also support the rise in prices in the next
few months. Steel demand from infrastructure and construction sectors is likely to improve in
the second-half of the year, catalysed by the festival season. Demand from automobiles and
consumer durables sectors is expected to pick-up due to the car models being launched with
BS 6 technology, attractive sale incentives and opening up of the economy in these
unprecedented times, although the increase in demand is expected to be moderate on
account of discretionary spends being deferred by some consumers during the remaining part
of the year. However, the latest move by the government with respect to the amendment in
the Mines and Minerals Development Regulation Act, if implemented, will have a positive
impact on the steel industry.
43,000
44,000
45,000
46,000
47,000
48,000
49,000
50,000
51,000
0
2,000
4,000
6,000
8,000
10,000
Au
g-1
9
Sep
-19
Oct
-19
No
v-1
9
Dec
-19
Jan
-20
Feb
-20
Mar
-20
Ap
r-2
0
May
-20
Jun
-20
Jul-
20
Au
g-2
0
Steel Production & Prices
Finished steel production (000 tonnes)
Finished steel consumption (000 tonnes)
Finished steel prices (Rs per tonne) (RHS)
Swati Khetan
(Sr. Analyst - Ratings)
Bal Krishna Piparaiya
(Senior Director - Ratings)
BWR Views
BWR maintains its near-term
outlook on the steel sector to
be turning moderately positive
with a slow pick-up in demand
and prices.
www.brickworkratings.com
September 2020 13
DEBT MARKET INDICATORS
Movements in Bond Yields
The southward trend in bond yields has taken a U-turn, and the 10-year G-Sec benchmark
bond yield rose by around 15 bps to 6% a month back, spiked further up to 6.25% in between
and has stabilised at around 6% currently. The upward movement in the G-Sec yield curve has
been lower to the extent of around 5/10 bps at the shorter end and higher to the extent of
20/25 bps at the longer end in 30 years. While liquidity in the system remains adequate, and
the RBI continues its security buying through OMOs and buy-sell swaps, the intervention
appears to have slowed down from the past. The reason could be that with the inflated
revision in the planned gross borrowing of the GOI from Rs 7.8 lakh crore to 12 lakh crore or
even higher for FY20-21 for COVID-related spending, and the borrowings requiring to be
completed by end-December 2020, the yield will in any way rise owing to ballooning
borrowing. BWR expects GSec bond yields to further harden and the 10-year yield to scale
back to the level it was at 6 months ago, @ around 6.3%, on account of the crowding-out effect
of government borrowings, a surge in inflation impacting real rates and the expected
deterioration in the asset quality of the BFSI segment on account of the ensuing one-time
restructuring of the debt of corporates impacted by COVID-19. Corporate bond yields are
expected to broadly move in tandem with the GSec yield, but may harden more in the longer
5-10-year segment, influenced by abundant supply of the zero-risk sovereign debt at attractive
yields.
The bond yield (annualised) issued by Public Sector Units (PSUs), corporates and Non-Banking
Finance Companies (NBFCs) maturing in 5-, 3- and 1-year tenures with the corresponding
government securities and Marginal Cost of funds-based Lending Rate (MCLR) of banks is
provided below.
Source: FIMMDA, SBI, HDFC, BWR Research
The yield of AAA-rated corporate bonds maturing in 5-, 3- and 1-year tenures has remained
volatile as investor confidence is witnessed to be returning on the resumption of operations
amid the outbreak of the coronavirus pandemic. The Government of India and RBI have
announced various revival measures, such as providing cheaper government-guaranteed
credit and liquidity through innovative tools, including TLTRO for corporates and NBFCs, to
mitigate their risks and business losses.
BWR Views
BWR expects yields to rise from
current levels owing to
expanded government
borrowings and a rising
deterioration in the asset
quality of BFSI, severely
impacted by a substantial
economic downturn owing to
the prolonged COVID-19
pandemic. BWR’s opinion
published in the earlier
Drishtikone issue of further
stimulus measures, such as the
onetime restructuring of loans
by the RBI, has turned out to be
true.
Bal Krishna Piparaiya
(Senior Director - Ratings)
4.00
4.40
4.80
5.20
5.60
6.00
6.40
6.80
7.20
7.60
8.00
02
-Ju
l
07
-Ju
l
13
-Ju
l
16
-Ju
l
21
-Ju
l
24
-Ju
l
30
-Ju
l
04
-Au
g
07
-Au
g
12
-Au
g
17
-Au
g
20
-Au
g
25
-Au
g
28
-Au
g
02
-Sep
07
-Sep
10
-Sep
15
-Sep
5-year AAA Corporate Bond yields vs Gsec yield, MCLR
PSU Corp NBFC
GSEC SBI MCLR HDFC MCLR
www.brickworkratings.com
September 2020 14
Source: FIMMDA, SBI, HDFC, BWR Research
Source: FIMMDA, SBI, HDFC, BWR Research
Yield curve of AAA PSUs, NBFCs, Corporates and GSec
The borrowing costs for bonds maturing in 1 year issued by the government, PSUs, NBFCs and
corporates continued to soften in August by 204-255 bps, against the corresponding period
last year due to several measures taken by regulators to deepen the bond market. The key
policy rate (repo rate) softened by 140 bps during the same period.
3.80
4.20
4.60
5.00
5.40
5.80
6.20
6.60
7.00
7.40
7.80
8.20
02-J
ul
07-J
ul
13-J
ul
16-J
ul
21-J
ul
24-J
ul
30-J
ul
04-A
ug
07-A
ug
12-A
ug
17-A
ug
20-A
ug
25-A
ug
28-A
ug
02-S
ep
07-S
ep
10-S
ep
15-S
ep
3-year AAA Corporate Bond yields vs Gsec yield, MCLR
PSU Corp NBFC
GSEC SBI MCLR HDFC MCLR
3.203.604.004.404.805.205.606.006.406.807.207.608.00
02-J
ul
07-J
ul
13-J
ul
16-J
ul
21-J
ul
24-J
ul
30-J
ul
04-A
ug
07-A
ug
12-A
ug
17-A
ug
20-A
ug
25-A
ug
28-A
ug
02-S
ep
07-S
ep
10-S
ep
15-S
ep
1-year AAA Corporate Bond yields vs Gsec yield, MCLR
PSU Corp NBFC
GSEC SBI MCLR HDFC MCLR
www.brickworkratings.com
September 2020 15
Source: FIMMDA, BWR Research
External Commercial Borrowings
According to RBI data, Indian corporates borrowed more than USD2 billion from offshore
markets in the form of External Commercial Borrowings (ECBs) and Foreign Currency
Convertible Bonds (FCCBs) during July 2020. Offshore borrowings have started to pick-up as
the economic activities of corporates have initiated to some extent.
Source: RBI, BWR Research
BWR Views
Going forward, Indian
companies’ borrowing through
ECBs will depend on the revival
of their activities and
production, and also on the
stability of their credit ratings.
6.70
4.23
6.94
4.55
6.90
4.35
5.87
3.83
5.40 5.405.15 5.15 5.15 5.15 5.15
4.40 4.404.00 4.00
4.004.00
3.203.604.004.404.805.205.606.006.406.807.207.608.008.40
Au
g-1
9
Sep
-19
Oct
-19
No
v-1
9
Dec
-19
Jan
-20
Feb
-20
Mar
-20
Ap
r-2
0
May
-20
Jun
-20
Jul-
20
Au
g-2
0
1-year rolling monthly yield curve for AAA PSU, NBFC, Corporate and GSEC
PSU NBFC Corp GSEC RBI Repo Rate
24
17
28
12
12
72
5
31
58
34
85
53
99
49
81
77
69
41
75
74
37
99
6 14
91
10
21 21
48
0
2000
4000
6000
8000
10000
12000
14000
Jan Feb Mar April May June July
External Commercial Borrowings (USD million)
ECB FY19 ($ mln) ECB FY20 ($mln)
www.brickworkratings.com
September 2020 16
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