Here is the link of the article: https://candorinvesting.com/2020/04/30/krbl-governance/amp/?__twitter_impression=true

Mohnish Pabrai, a famous value investor tried to buy a stake in KRBL from one of the existing investors – Omar Ali Balsharaf. However, the Enforcement Directorate (ED) accused Balsharaf of buying the KRBL shares using crime money which he got from the VVIP chopper scam. Due to this the deal was not closed.

Balsharaf filed a case in the Delhi High Court. The High Court concluded that Balsharaf who is the distributor for KRBL products in Saudi Arabia had acquired the stake in 2003. However the crime had been committed five years later in 2008. These meant that the ED officer was lying.

It is alleged by ED that Gautam khaitan (Independent Director of KRBL between July 2007 and April 2013) has been the beneficiary of Rs 850 Cr in various defense deals, a part of which has been routed through a step-down subsidiary of KRBL – RAKGT. Gautam Khaitan was made to resign as soon as his name appeared in the scam, no charges has been pressed against the KRBL management.

It was found that the promoters and directors of KRBL, DMCC transferred shareholding in the name of Anurag Potdar, the nephew of the promoters of KRBL Limited.

The KRBL management claim that they had no ties with RAKGT and it is run by its nephew.

KRBL only provided a way to route the crime money and the amount was much lesser than the total amount involved in the scam.

Embraer Case – Attachment of property

When ED failed to make progress in VVIP chopper scam, it took to another scam – the embraer case. The ED alleged that KRBL had land property worth Rs 15 Cr which it believed was bought using crime money. The KRBL management engaging in a scam for a small amount of Rs 15 Cr seems bizarre.

8th Feb 2019:

The IT department disallowed expenses of Rs 2221 Cr and raised a tax of Rs 1270 Cr. Rs 1996 Cr of these expenses was for paddy purchases made from the farmers. KRBL management claimed that there are different method of paddy purchases in different state. It said that purchases from farmers disallowed as expenses by the IT department actually directly purchases from Uttar Pradesh farmers.

Management also had the Mandi Receipts. For the procurement they had done directly from the Uttae Pradesh farmers.

13th Mar 2020 

The KRBL management was vindicated on appeal and the tax demand notice was reduced to Rs 101 Cr.

All these gives us a picture that KRBL management is fair in its conduct and any claims on the company seem to be wrong.

Here is the link of the article: https://finception.in/markets/real-estate/?utm_source=HomePage&utm_medium=ReadMore

A Real estate research company name Liases Foras, had published a report on the total disposable income which real estate developers were expected to make in that year. A careful analysis of the report, stated that if the developers did not increase their margin, they would find it difficult to repay their interest obligation. If the report was true, the developers were more likely to default unless there was a large scale intervention.

Tracing the origin:

GDP growth was very high during 2004-2008 and thus to take advantage of the growth opportunities several new projects were launched using much of borrowed capital. These were projects in sectors like steel, power and real estate. These set off the biggest investment boom before the advent of the Global Financial Crisis in 2008. The most affected were the companies which had borrowed huge amounts to fund expensive projects. Real Estate developers, thinking that the boom would continue perpetually, borrowed excessively and stocked unproductive inventory.

 Interest costs increased in the economy, due to two factors :

1. In domestic Borrowing due to RBI intervention
2. Borrowing from aboard due to rupee depreciation

Where is the Stress?

When interest rates increased, the real estate sector should have seen a downturn which did not happen as the property prices were raised even more which isn’t a good sign since the appraisal in property prices was credit driven. This also increased the value of their inventory which created room for more debt.

As residential property prices went up, rental yields declined from 8% to 2%. With a home loan interest of 10%, a lot of money would be lost if housing prices don’t appreciated disproportionately.

Sweep it under the rug:

Eventually, some developers began to show stress and the best measure would have been to force them to pay. However, if they were not able to pay, bankruptcy should be filed which would mean showing NPAs in bank’s balance sheet which isn’t acceptable in the banking circle. Thus, the banks started evergreening loans and started giving loans to fund interest obligations on previous loans. Eventually RBI intervened and the first casualties were reported from the infra and the power sector. By 2015, Ambit capital explained why real estate sector was to face a slowdown. This was because the lending had dried up and unsold inventory had to be sold at throwaway prices. This was believed to bring the price correction which was long overdue.

However, this did not happen. As banks did not lend, NBFCs and private equity stepped in to fill the void. There were a few bankruptcies but there was no pressure on housing prices. However, these doesn’t mean that there was nothing wrong with the sector. When the real estate act, 2016 was passed, it restricted the developer’s ability to raise cash from prospective buyers and penalized them for late delivery of homes. This put pressure on land prices as the demand was almost non-existent from the real estate sector. This was followed by demonetization and then GST and the real estate sector was in a state of helplessness.

NBFC Malady:

NBFCs were funding those projects which had not even started and thus were risky contrary to public sector banks which were funding projects that were in the later stages of their devlopment. Due to the stress in the real estate sector, NPAs were pretty obvious to show up. However, they resorted to ever greening of loans to save themselves from NPAs. One way by which, optimists think, prices can be corrected is through affordable housing.

 The problem is that the institutions engaged are NBFCs which are not backed by the government and thus, hiding these NPAs can prove to be disastrous. At the same time, most NBFCs are engaged in short term borrowings to fund long term debt which is a situation of asset liability mismatch.

The ILFS crisis has made it difficult for NBFCs to raise loans. Thus, the real estate developers will have nowhere to go but to sell their inventory at lower prices. The recourse might be affordable housing but the expensive stock accumulated during the boom needs to be revalued and there would be NPAs and price declines coming in the near future.

Here is the link of the article : https://a16z.com/2020/04/18/its-time-to-build/

The article starts with putting forward the point that the corona virus pandemic has acted as an eye opener for the Western Nation in terms of their level of preparedness and their institutional ineffectiveness in dealing with it. The cause of it cannot be attributed to any single political party or any single nation. The route of the problem lies in lack of imagination and the inability to build.

The article continues the discussion by stating that there is a scarcity of medical facilities required to test and cure patients. It is believed that the vaccine for this virus will take time to develop and even when it is developed, maybe there would be an absence of the means to scale up its production.

Many people in the United States are suffering due to a storage of capital and mass layoffs. However the government which has always collected from the public doesn’t seem to have a plan to give it back to its people when its required the most.

The absence of all these things reveals that we chose not to build.

Not just these factors, other too show these traits:

• Housing: In many places in America like San Fansico people have failed to create enough housing facilities because of which the prices are rising and people are not able to settle and take up new jobs.
• Education: Though the education sector has improved but it serves only a handful of student population. There is a lack of the number of Universities and there is absence of techniques like one to one learning which can improve education outcome manifold.
• Manufacturing: American Companies find it feasible to outsource manufacturing due to the availability of cheap labour. Highly Automated factories, if built the number of high paying jobs it would create will be enormous. Efforts towards these are absent.

All these is not due to any scarcity of technology or capital, there is the lack of want to build.

Public Sector can play a tremendous role in building new health care, education, housing, etc and that too in an effective manner.

Anyone can contribute to the process of building it can be CEOs, political party, entrepreneur and even the general public. People can either contribute by building for by helping those who are building or by teaching those who are building.  In this way every person can contribute to the process.

Our Co-fathers had built road, factories, computers and what not. This is our time to pass on the legacy inherited by us from our co-fathers to the next generation.

Here is the link to the article https://www.cnbctv18.com/views/how-the-banking-system-works-and-money-is-created-an-explainer-5143971.htm

Banks have to maintain two types of reserve namely CRR and SLR. If the balance is excess than required then it is banking liquidity surplus.

If CRR’s amount is lower than what is required then SLR can be used to fulfil the required amount. Banks can do so by RBI’s LAF window. They pay LAF policy repo rate for this transformation.

In the same way, if SLR’s amount is lower than what is required then CRR can be used to fulfil the required amounts. For this banks have to pay LAF policy reverse repo rate.

Every time a fresh loan is given by bank it creates a fresh bank liability.

The constraint in bank capital is that with the increase in loan book size the requirement of capital also increases.

Liquidity in banks can be alter by RBI only through Open Market Operations (OMOs), Foreign Currency intervention,  government spending, currency in circulation, by setting minimum requirements of CRR and SLR.

Individual banks can only alter their own liquidity. If they have surplus than they will lend money and can buy risk-free securities, both of which will lead to decrease in short term rates. Through this banks are encouraging lending.

If they have deficit then they will accept deposits and will sell risk-free securities, both of which will lead in increase in short term rates. Through this banks are discouraging lending.

Here is the link to the article https://www.capitalmind.in/2020/04/what-is-a-tltro-and-why-does-it-impact-non-banking-financiers/

Due to lockdown businesses are closed and people have almost no source of income. Due to this RBI has provided moratorium to borrowers. Moratorium means borrowers can now delay their payments and pay it later with extra interest.

But problem here is with NBFC’s. NBFC’s will face liquidity problem as borrower will not pay them before 3 months and the banks from which NBFC has borrowed isn’t providing moratorium to them. This means NBFC has to pay (either through cash reserves or by issuing new bond) and if they fail to pay then this will lead to downfall in credit rating to ‘D’. This will destroy their borrowing power.

RBI intervened in between as it doesn’t want this market to freeze. Earlier RBI gave money to banks to fund this NBFC’s but this didn’t work. So RBI came with TLTRO (Targeted Long Term Repo Operations).

Under this scheme banks will borrow money from RBI at repo rate and will have to park that money into bonds. This investment is to be done within 30 days failing to which will lead banks in paying 2% higher interest.

Some key points of TLTRO:

• Banks can buy maximum 10% of allocated amount to one entity.
• 50% allocated amount should be used for fresh issues and 50% amount for secondary markets.
• Banks have to return the money (which they availed from RBI) after 3 years with interest.
• Bonds can be bought of any duration. There are no criteria for this. The only criterion is that banks have to reinvest the money until TLTRO expires.

Mutual funds can also sell under secondary markets.

NOTE: RBI DOESN’T GUARANTEE THESE BONDS.

The first phase didn’t work as banks deposited money with corporates (like Reliance Industries etc.) rather than depositing with NBFC due to risk associated with them.

So RBI came with version 2.

Some key points of Version 2 TLTRO –

• Minimum time to deploy funds is increased from 30 days to 45 days.
• Full amount should be used in buying NBFC’s bonds.
• 10% amount i.e. Rs. 5000 crores should be allocated to Microfinanciers (MFIs).
• 15% amount should be allocated in NBFC’s with asset size of Rs. 500 crore and below.
• 25% amount should be allocated in NBFC’s with asset size of Rs. 500 crore to Rs. 5000 crore.
• Rest 50% can be allocated according to their choice.
• No criteria for primary and secondary markets.
• Earlier cap of 10% with single entity removed.

According to these, large NBFC’s (with asset size more than Rs. 5000 crore) will see only Rs. 25000 crore. Also a couple of companies can eat up this whole amount. Even some NBFC’s which doesn’t need money can raise money.

The main risk is of default which has kept banks away from even large NBFC’s.  Thus TLTRO might help only large NBFC’s and RBI can step-up to take some risk.