# Learning of the week (1)

Explanation: This article deals with a question: “Why do banks constantly borrow from RBI instead of raising deposits from public?” In mid 2019, banks were facing “liquidity deficits”.

Out of the total client and time deposits (also known as NDTL-Net Demand and Time Liabilities), banks cannot disburse every penny as a loan. Banks are required (by the RBI) to keep some % of NDTL in reserves. There are two reserves-Cash Reserve Ratio (CRR) and Statutory Liquidity ratio (SLR).

CRR is set as 4% of NDTL whereas, SLR is not exactly calculated directly on NDTL. However, roughly, SLR is set as around 18.25% of NDTL. In total, banks roughly set aside (18.25%+4.%) 22.25% of NDTL in form of reserves with RBI. The 4.5% and 18.25% are the minimum requirements, and not the maximum.

Note: This percentage is not exactly equal to 22.25% because the calculation of SLR is not directly done on NDTL. Thus, we will take 25% as a safer number.

There is a facility given by RBI called Liquidity Adjustment Facility window-LAF window. Through this window, the banks can meet the CRR shortfall by transferring the excess SLR to the CRR (at a LAF policy repo rate of 5.15%). Similarly, the banks can meet the SLR shortfall by transferring the excess CRR to the SLR (at a LAF policy reverse repo rate of 4.90%).

Let us take an example. If the banks have INR 100 in NDTL, then (25% of 100) INR 25 will be kept aside for reserves. However, when you see the balance sheet, you get to know that the bank has kept aside INR 40 for CRR and SLR in total. This means that the bank has an excess reserve of INR 15. In order to know the amount of loans that can be disbursed by the banks using these excess reserves of INR 15 is calculated as: INR 15 is 25% of what? INR 15 is 25% of INR 60. This means that using these excess reserves only, the bank can lend loans of INR 60 without keeping anything for reserves.

Explanation:

This video starts with a question, “Do you think MNC managements are clean?” As per the speaker, Amey Kulkarni, the owners of the giant companies prefer MNC management rather than Indian management. Why? He explains this concept by taking Clariant Chemicals (India) Limited as an example.

Clariant Chemicals (India) Ltd is a Switzerland-based specialty chemicals manufacturing company.

Clariant Chemicals (India) Ltd has around 30 subsidiaries and one among them is, Clariant Chemicals (India) Private Limited.

Why is the Indian subsidiary a private entity? This question might have arrived in your mind, already. Let us find an answer.

The Clariant India Private Ltd is not owned by Clariant Chemicals (India) Limited. It is rather owned by Clariant (Singapore) Pte (private) Ltd. Not to mention, The Clariant India Private Ltd transacts with the Clariant (Singapore) Pte Ltd. Around 34% of The Clariant India Private Ltd’s revenues come from the Clariant (Singapore) Pte Ltd. This is slightly indigestible.

The Indian listed company of Clariant Chemicals doesn’t have any stake in the Indian unlisted company of Clariant Chemicals. This raises an eyebrow, right?

Now, when we open the annual report of Clariant Chemicals (India) Limited, one of the directors/key personnel is Deepak Parikh.

And when we see other directorships of Deepak Parikh in 2014, there are none. However, this “NONE” does not include the directorships in Private Limited companies. This is where we start doubting the management. Why does he (Deepak Parikh) want to hide the directorship?

If we have this doubt, then are we going to invest in the company? Probably, no. However, in order to even have this doubt, we need to perform a hard-core analysis. As per the statistics, 99% of people who invest do not read annual reports. This is the reason why investors are unaware of such deceits and as a result, they lose their money.

At last, he gives an invaluable piece of advice saying, “Your reason of investing in a non-clean management should be 10 times greater than your reason of investing in a clean management.

If someone is making money by cheating others, she/he will never be able to provide value to customers/investors, says Amey Kulkarni.

The main objective of this video is to show that the MNCs might have an unclean management. Not all of them are unclean; however, there are a few. We need to perform forensic accounting (check details of all the subsidiaries, promoter and directorship details, etc.) and then conclude whether the company’s management is really good or not.

Explanation:

This article talks about TLTRO-Targeted Long Term Repo Operations. TLTRO is an operation through which RBI is attempting to solve the financial/liquidity crisis faced by corporates (specifically, NBFCs).

What are NBFCs?

NBFC (Non-Banking Finance Company) is not exactly a banking institution. However, NBFCs also lend loans to individuals and corporates. Unlike banks, NBFCs cannot accept deposits i.e. they cannot let their customers open savings/current/fixed deposit account with them.

A general structure of an NBFC is:

In these tough times of COVID-19 pandemic, RBI has instructed the banks as well the NBFCs to provide a moratorium period of 3 months to their customers/borrowers i.e. the customers are allowed to not pay their EMIs of loans for 3 months (however, after three months, EMIs will contain extra interest). This moratorium period has been a relief for the customers who were finding it difficult to pay the EMIs.

As we saw in the diagram, NBFCs raise money either by taking loans from banks or by issuing bonds. Also, banks give loans to other corporates. The banks which have loaned the NBFCs and other corporates have not provided any moratorium period to them.

So, the main issue is: NBFCs are not getting EMIs from the customers but they have to pay the EMIs to banks or they have to pay the interest to the bondholders. Also, the corporates are facing liquidity issues because of the economic slowdown faced in the current times. These corporates also need to pay their loans to the banks while not getting any revenues from the customers.

What if corporates and NBFCs delay the interest payment of the bondholders?

If these companies delay the interest payments for even one day, then it will be considered a “default” and the credit rating agencies will downgrade their bonds. This downgrade will further lead them to difficulties in issuing new bonds or raising money.

Thus, delaying interest payments is not a feasible option.

This image shows that around Rs 62,000 crore redemption is due till September-around 5 months from today.
Note: This image only includes 11 firms’ data.

How will these NBFCs pay such huge amounts in the next five months?

They can either use their cash reserves or issue new bonds. The former option is not feasible because they are running out of cash. The latter option seems feasible on face value, but it isn’t because the bond market is already in a freeze-zone. In these tough times, who will even buy their bonds? They are not even earning any revenues as of now.

There’s one entity who can buy their bonds-Reserve Bank of India. However, RBI doesn’t want to help these NBFCs directly. So, in order to address this issue, the RBI has come up with TLTRO.

In simple words, TLTRO can be described in three steps:

1. RBI will provide banks with some money by giving loans to banks.
2. The banks will buy the newly issued/existing NBFCs’ bonds from this money.
3. The NBFCs will make the interest payment using this money.

Important points of TLTRO:

• Total budget of TLTRO is 1 lac crore, divided in 4 tranches of 25,000 crore each. The last tranche was up for bidding on 17th April, 2020.
• The banks will get the money from RBI at 4.4% interest rate (the repo rate). This interest rate will change when the repo rate changes.
• If banks do not invest this money (money borrowed from RBI) in the bonds of corporates and NBFCs within 30 days, the banks will have to pay a 2% higher interest rate to RBI.
• The bonds in which these banks invest need to be investment graded. The duration of bonds can be any.
• Out of the total money raised from RBI, a bank can invest upto 10% in one company or group. Also, 50% of the total money raised are to be invested in fresh bond issues, and the rest 50% in secondary market/existing bonds.
• The TLTRO is a three-year operation.
• After three years, banks will repay the money to RBI along with the interest. Note: No intermediate interest payment is required to be made by the banks to RBI.
• Also, mutual funds are facing numerous redemption requests. These mutual funds are not able to sell the bonds in secondary market (because the bond market is frozen). And due to this, they are facing issues in fulfilling the redemption requests. Through TLTRO, banks will now buy these bonds from mutual funds and mutual funds will then fulfill the redemption requests.

However, the main point is: Even if these bonds (which the banks are buying through TLTRO) default, the banks will still have to repay to the RBI. Because RBI doesn’t guarantee the bonds which the banks are buying. BOOM!!

This is why the first version of TLTRO (explained above) didn’t fare well.

TLTRO version 2:

This new version is specifically for NBFCs. Through TLTRO 2.0, RBI will lend 50,000 crore to banks in the same way as it did in the first version. However, banks can only buy the bonds of NBFCs (and not any other corporates) through this money. 50,000 crore were divided in 2 tranches-25,000 crore each. And the first tranche’s bidding was done on 23rd April, 2020.

Allocation of 50,000 crore will be as:

10% for MFIs
15% for NBFCs having AUM of less than 500 crore
25% for NBFCs having AUM between 500 crore and 5,000 crore
Rest 50% can be invested as per the banks’ discretion

However, the main concern is: Will 25% of 50,000 crore (12,500 crore) be sufficient enough to solve the liquidity issues of big NBFCs? Will banks be able to find around 25-30 small NBFCs?

The conclusion, as per the author, is that in this whole TLTRO event, big NBFCs will benefit and small/weak NBFCs will continue to struggle. The RBI is using TLTRO (1.0 and 2.0) because it doesn’t want to directly fund/help the struggling corporates/NBFCs.

However, if the bonds (which the banks are buying through TLTRO) default, then how will banks repay the loan to RBI? Will they shy away? Maybe, not. Will they make huge losses and wipe off their equity? Maybe, yes.

Explanation: In this video, Mr. Ramesh Damani is interviewing Mr. Manish Chokhani.

If you are not confused by what’s going on, then you don’t really understand what’s going on.

Charlie Munger

This quote suits well in today’s situation. COVID-19 outbreak has created a lot of confusions among people. Investors are confused whether to buy the stocks right now or wait for some more period or sell the stocks. Addressing this issue, Manish Chokhani said that the world has never seen such a crisis.

These are tough times for everyone including investors. The fundamentals of the companies haven’t changed at all but (almost) every company is seeing the stock price go down. He also says that after a certain period, we will be back to normalcy. However, what happens during this period is very unpredictable.

“Why are market indices of developed nations not falling (in fact, they are rising)? Why are market indices of emerging nations seeing a downturn?” Addressing this question, Manish Chokhani says that it has always been like that. West plays this game very smartly. Just like 2008, these countries are pouring more and more money in the economy to stabilize the situation.

The global debt keeps on increasing, majorly due to developed nations. How will these countries pay off the debt? Will they have any other option but to take more and more debt?

Despite the fact that these developed nations have so much of debt, their sovereign credit ratings remain investment grade. Whereas, India takes up the responsibility of the debt and repays it. But India has a sovereign credit rating which is a notch/two notches higher than the junk bond. This is the disparity that exists.

Why do other countries not go against America? There are two reasons: 1. They believe Fed is too big to fight. 2. US dollar is the reserve currency.

The interest rates in the world are at (around) 5000-years low, the oil is at 2-generations low and suddenly, China is not the friend of most of the nations. As per Manish Chokhani, these are the right times for India to grow. India needs to grab this opportunity or else it will lose its place.

At the end, Manish Chokhani says that after this pandemic is over and everything is back to normalcy, the innovative companies will emerge as winners.

Explanation:

No country was ready for this COVID-19 pandemic. But instead of not doing anything about it, it’s time to build says the author. This problem will not be solved by blaming a political party or a country. Blaming others only shows our lack of foresightedness and imagination.

Today, we do not have access to things which we want urgently-ventilator beds, ICUs, masks, medical gowns, coronavirus test materials, etc. We do not have vaccines against coronavirus. Hopefully, even if the scientists invent the vaccine (for this, they will need proper manufacturing houses/plants), it would not be an easy journey. It took 5 years for the scientists to get approval of Ebola virus vaccine. Within those 5 years, we lost many lives.

The author then remarks about the government system. The government has a very fine system to collect taxes but it does not have a channel/system to easily provide money to people in need. He says, “We chose not to build.”

There was a very good point made by the author. We have top universities; but we do not have a system where every learner can get into the contact of a tutor? Why? Why is every 18 year old student not getting the basic education?

The manufacturing sector, the housing sector, the education sector-almost every sector lacks development. What is the reason? Is it money? No. The federal government has ample amount of money to bailout failed entities and to sponsor the wars; but it does not have money to develop these basic sectors.

What should America do in order to build? Firstly, the process of building America should be kept separately from its politics and agendas. We need to build new products, new industries, new factories, new science and much more. Every citizen of America should build something, or should help someone in building something. If every citizen will do this, they will build a nation together. Every citizen should choose a career through which she/he can help in building America. The country’s talent should come together and solve/build the problems.

Lastly, the author says that our ancestors built so many important things for us-roads, trains, factories, computers, smart phones etc. we take all of this for granted. It’s high time now that we start valuing them and also, it’s time to contribute to the building of the nation.

Note: The article is written by an American. So, it will contain American examples. However, it applies to India also. If every Indian citizen contributes in building the nation, then we can together build a country on which we can be immensely proud.

Explanation:

The above image shows the current situation of real estate. If this continues, then the real estate developers will have no option but to default.

In the 2008 Global Financial Crisis, India remained unscathed. However, in the period of 2004-2008, the real estate developers made huge capital-investments thinking that the real estate boom will not end anytime soon. They incurred huge expenses in this period (by borrowing capital) and once the bubble burst, they were in no position to repay the debt. The revenues stopped too.

In 2008 Global Financial Crisis, almost 40% of real estate developers’ loans became non-performing.

Why is it more difficult for infrastructure companies to repay the loans than for real estate companies? It is because infrastructure companies build roads and airports which cannot be mortgaged. So, they do not have an option of giving away the rights of the mortgage.

Explanation:

Explanation: The vidoe starts with the Marshmallow theory. What is this theory about? This experiment was done in 1960s-1970s by Walter Mischel, a psychologist and a professor at Stanford University. In this experiment, children are offered marshmallows. however, they have two options-either immediately get one marshmallow or get two marshmallows after 15 minutes. The statistics of this experiment showed that the children who waited patiently for getting those 2 marshmallows fared well in life in terms of educational attainment, body mass index, SAT scores etc.

Thomas Russo was studying law and business at Stanford University. During his graduation, Warren Buffet came to the university to give a guest lecture. Since 1982, he has been in the investing field.

Thomas Russo is a value investor. He believes in long-term investing. He also says that equity investing is for people who can endure short-term market fluctuations while focusing on long-term benefits. He then emphasizes on the fact that government doesn’t charge taxes on unrealized gains; also, the long-term capital gain tax (LTCG) is lower than the short-term capital gain tax (STCG). This is also a reason why investors should invest with a long-term vision.

Important points on which Thomas Russo has emphasized:

• An investor should invest in interesting businesses so that they would consistently follow these businesses and spend more time on the analysis.
• He supports the concept of margin of safety (this concept was first introduced by Seth Klarman and is strongly believed by Warren Buffet).
Note: To know more about margin of safety, visit book review section.
• Choose to invest in businesses which focus on long-term success rather than engaging in short-term horse race.

With the help of the above image, the author explains the concept of return-oriented mindset. He believes that businesses which have the capacity to suffer (i.e. which can take losses in short term to gain profits in the long-term) are hard to find. Most of the businesses are short-term-return oriented businesses. He also advises to invest in businesses having strong brands. The business should have the capacity to reinvest (if reinvesting opportunity exists in the first place) the capital and grow at a higher percentage.

Explanation:

This article talks about how everything is going wrong for KRBL-Khushi Ram Behri Lal Ltd. Monish Parbai, a value investor, attempted to buy a significant stake (2.7%) in KRBL from Omar Ali Balsharaf. However, the ED-Enforcement Directorate asked SEBI to block this transaction because the ED believes that Omar Ali Balsharaf was involved the VVIP chopper scam and that this 2.7% stake was being bought with illegal money/crime money.

Omar Ali Balsharaf has also retaliated by filing a case against the ED in the High Court. The High Court judgement says that the VVIP chopper scame happened in 2008 while Omar Ali Balsharaf was buying the shares of KRBL since 2003.How is it possible to use the crime money of 2008 to buy shares in 2003?

The former director of KRBL, Gautam Khaitan, was also arrested in the VVIP chopper scam. Gautam Khaitan was an independent director of KRBL from 2007 to 2013.

KRBL’s management claims that the company doesn’t have any relation with RAKGT apart from Anurag Potdar being the nephew of a promoter of KRBL. The ED believes that KRBL is routing money through RAKGT.

After this, the ED again accused KRBL of being involved in the Embraer defense scam and accused that the land in Dhuri (Punjab) was purchased by the crime money. However, the financial statements of KRBL show a profit after tax (PAT) of around 500 crores and fixed assets of around 1,500 crore. WHy would a company with a 500 crore PAT involve in a scam (Embraer defense scam) which could provide 15 crore to it?

The author then gives an example of ITC Ltd. ITC Ltd. was accused of excise duty evasion in 1990s. 15 executives of ITC were arrested. But what happened afterwards? In the last 25 years, the stock price of ITC Ltd. has gone up 33 times. The point here is: KRBL will also be able to get out of this mess. Once the investigation is over, the invetsors will forget about the incident and move on.

The observations of ED suggest that KRBL was involved in routing money in the VVIP chopper scam. However, no charge sheet is filed against KRBL or any of its promoters.

Article by-Jay Gohil and Krisha Kansara