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NBFC Covid crisis: NBFC system is broken because we didn’t fix the Lehman problems: Ajit Dayal

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By Ajaya Sharma


This is not a black swan event but a black crow event. There are crows everywhere who took bad credit portfolio risk and it is now coming home to roost, says the Founder of Quantum Advisors.

How are you observing the global landscape? If you talk about the finer details, what exactly has happened to the world in your view? What are your observations on the global environment right now?

If you go back a bit in history, you will realise that after the Lehman collapse in 2008, the entire world has been reflating and printing money and has been trying to get the economies to move. They have got markets to move for sure. There has been a phenomenal run up in share prices and very good run up in bond prices as well because the interest rates have been coming down. Interest rates and share price and price of bonds move inversely. So we have had this massive asset run up over the last decade or so and for the last two-three years, everyone has been waiting for something that will slow the markets and the economy down. Nobody thought that the collapse would come from something that will happen in China.

They thought there is something wrong in the Euro zone that would actually erupt and something would go wrong there. Even in the US, with excessive debt, people thought there would be failure of student loans or auto loans; something which also picked up in the last two years. Everyone was expecting for something to happen which would slow down world growth and cause a collapse in the stock markets.

What has this pandemic done to valuations in your view, both globally and in India. What are your observations on the commentary coming in from various parts of our market?

On a worldwide scale, if you look at the S&P, when it fell to its lowest point in March, it was close to where it was at the time when Trump came to power and it has recovered from there. Look at our market. Our market was about 18,000 on the BSE 30. I am an old school guy; so I will refer to the BSE 30 numbers. It was about 18,000 in September 2013. That is the time when we had the Fragile Five crisis because Ben Bernanke, the then US Fed governor said he may raise interest rates. This caused a massive problem across the emerging markets, including India and the Indian stock markets fell. The rupee went from Rs 55 to Rs 66 to a dollar within a few weeks and at that time, we had a planned transition of the RBI governor. We had Raghuram Rajan who came in September 2013 and coincidentally we had Prime Minister Modi who was nominated as the BJP prime minister candidate; the markets were at about 18,000 levels then.

Prime Minister Modi got elected in a landslide victory in May 2014 and the markets touched 24,000. If you look at the market floor, in some sense it was the day Prime Minister Modi was elected in 2014. Since then we have had a massive inflow into domestic mutual funds. The phenomenal win of the Modi government has been the confidence that people have shown by moving the money back to equity after all the redemptions that happened after the Global Financial Crisis. And the markets tested that level on 23 March; we came down to 25,000 on the BSE 30 index, very close to where we were at the time of Modi’s inauguration time in 2014. So in some similar way, you had the Trump win and the market run up and the markets coming down nearly to those levels and then you had Prime Minister Modi use that as a base; the markets ran up and came back down to the same level.

But on a PE ratio, the markets are still nowhere close to where they were during SARS or the Lehman crisis; the PE ratio of the indices or the NSE 50 or the BSE 30 was 8 to 9 times the time of SARS in 2003 and again 8 to 9 times PE ratio historical at the time of Lehman; now we are still at 17.

Are you indicating that there is a downside scope?

I am suggesting that people who are talking about this market being a disaster have not seen history; history is in terms of valuations and not index levels. So yes, in my view, if the government doesn’t step in and doesn’t come up with a definite and firm plan to rescue the economy, can the market test lows? Of course, it can. Will it test the lows if the international markets recover, which it is, and if international investors plan to put more money into emerging markets like India, that could act as a floor. Now I have to again look westwards to see if money is going to come in to keep our asset prices alive rather than relying on our own domestic policies and domestic vehicle market’s strength. That is the sadness. We are fiscally vulnerable. This is what someone outside thinks about us as opposed to what we think about our own economy.

What kind of companies in your view would be able to weather the storm and which are the fragile business models which will crumble under the pressure? What is your hypothesis?

Let us look at the pluses. You are going into technology because they have high cash and no debt. You are going into pharma because healthcare is now going to be the focus and it looks like a defensive bet. You are going into FMCG because they have no debt by and large and people are still going to consume stuff even sitting at home. So I may be sitting at home but I am still eating food and still trying to shave whenever I can. So the FMCG sector is seeing sales.

I may not be eating food at a restaurant but I am still buying the dal and chawal to cook at home. The sales are still happening. The volumes are still there. The restaurant guys lost the value add but the guy who is making me the rice or the dal or the chapatti or the ingredients are still getting their sale of volume. We are not eating less, we are just eating differently. That is why it is defensive.

But let us dwell some more time on the financials. Now that has been broken for a long time. Under the UPA 2 government, we had excessive capex; a lot of it could have been crony capitalism. So all the unwinding of that through the NPAs and through the change in the RBI has come to the fore now and on top of that you have a real estate sector that has been protected by the government probably because a lot of politicians own or have connections to real estate companies.

In any market, everywhere in the world besides India, after the Lehman crisis in 2008-2009, all the bad real estate companies with unsold apartments were cleared out. They were forced to sell their properties or were taken over by the banks and the market cleared it. In India, what happened is the PSU banks and the private sector banks kept these real estate zombie projects alive and for the last decade, you have lower sales in real estate but you have got these companies sitting there, borrowing money and refusing to bring their price down and refusing to give millions of Indians who want property a break in the price because they want the profit margin. So you had the NBFCs supporting zombie real estate. With the collapse of IL&FS, all of that has come to the fore and you have had the entire NBFC sector unwinding its position to high credit risk. Believe me Franklin is not the only fund house that has problems in its portfolio. This is a pandemic across the mutual fund industry. The fund managers on the debt side and on the fixed income side have made idiotic bets on high credit to show higher rates of returns and to gather more AUM. And that is now how it is breaking.

I know that people are coming on your channel and saying this is a black swan event. That is a lie. This is a black crow event. There are crows everywhere and they just took bad credit portfolio risk and it is coming home to roost now. The pandemic and the fact that we are all sitting at home is a black swan event. The fact that fund houses have taken excessive risk to show higher returns to fool investors and capture the theme into the AUM is a black crow event. It happens every time; that is what the fund industry by and large does. So I would like to divorce the two by saying that the NBFC system is broken because we have not fixed the Lehman problems and now the pandemic is the straw that breaks the camel’s back. We are in complete shambles and it will take a lot of effort from the RBI and the government to get money to flow to the right places yet again.

If one were to take all these facts and data into account and build a hypothesis for Indian equities three to five years far, what is the kind of hypothesis you have in a base case scenario, in a worst case scenario and a best case scenario?

Firstly, I want to move to the individual. The individuals are locked down at home, unsure whether they have a job to go to or not. April is a month when you normally get a salary increment in India and now you do not know when the lockdown will be over, whether you will get a job at all or not and what kind of salary you are going to get. Will it be the same or higher or lower? So firstly, I hope that the individuals have kept enough money aside in their savings bank and in their liquid funds to ensure that for the next six-nine months, they are safe in case they do not have jobs.

Moving to markets, our assumption is that in the next few quarters, the economy will be back. We do not know how it is going to evolve but as you spoke about FMCG and a few other sectors, there is still demand for products. So if valuations are sensible, it is a great time to buy good businesses at sensible prices. They are not inexpensive. For the market to be inexpensive or to go back to the Lehman levels, it needs to go back to 18,000 to 20,000. If the index is at 18,000-20,000 on the BSE 30, then on a PE ratio level you are back to where you were at the Lehman time. We are 30,000 plus at this point in time. That fall may not happen; so do not wait for it.

In my view, if you have excess cash and you are in that position where you had kept money aside to invest in the market, then please do. If you are fully invested in the market and you are losing money and you have no money in the bank, save money in the bank despite the fact that you are losing money. First, please build your buffer for six-nine months of expenses because these are very uncertain times and you must have money to look after your family and to look after yourself. Forget about the markets in that sense.



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Martin Lewis issues guidance on using credit cards to build ratings – best deals | Personal Finance | Finance

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Martin Lewis regularly urges savers to use caution when utilising debt themed products but at the same time, he acknowledges the need for a decent credit rating to get by financially. Today, the Money Saving Expert was questioned by viewer Miranda on how one can build their credit rating in difficult circumstances.

“What I’d then like you to do is go and do £50 a month of normal spending on it, things you’d buy anyway.

“[Then] Make sure you pay the card off in full every month, preferably by direct debit so you’re never missing it because the interest rate is hideous.

“That way you won’t pay any interest.

“You do that for a year, you’ll start to build that credit history, showing them you’re a good credit citizen.

“Then you’ll be able to move into the sort of more normal credit card range.

“So, bizarrely, to get credit you need credit. What credit will you get? Bad credit, go get the bad credit just make sure it doesn’t cost you.”

Consumers of all kinds may not have the best options at the moment as recent analysis from moneyfacts.co.uk revealed.

In mid-November, they detailed that a number of high street banks have cut the perks and interest on a number of their current account deals.

On top of this, the Bank of Scotland and Lloyds Bank made credit interest cuts of up to 0.5 percent.

Rachel Springall, a Finance Expert at moneyfacts.co.uk commented on the few options consumers and savers currently have available: “Clearly, it is vital consumers decide carefully if now is the time to switch, but if they wait too long, they may well miss out on a free cash switching perk.

“At present, providers will be assessing how they can sustain any lucrative offers in light of the pandemic.

“With this in mind, we could well see more changes in the months to come and if this does indeed occur, consumers would be wise to review whether their account is still worth keeping.”



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Should you use a balance transfer to pay off debt?

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Should you use a balance transfer to pay off debt?
Image source: Getty Images.


A balance transfer might be the solution if you have debts and want to gain control over your finances. But whether a balance transfer is right for you will depend on a number of factors.

Things to consider before using a balance transfer

The size of your debt

If you want to apply for a balance transfer credit card, be aware that most providers will allow you to transfer up to 90% of your credit limit.

Your credit limit will be dependent on your own personal circumstances, including your salary, your credit history and your residential status (homeowner or renter).

Be realistic about your debt. For example, if you earn £25,000 per year and you have a debt of more than £15,000, a balance transfer might not be cheapest way to pay the debt.

The time taken to pay the debt

The main advantage of a balance transfer credit card is that many offer an interest-free period on the balance. So, if you can pay off your balance in that period, you won’t accrue any further interest charges.

However, these periods typically range from 18 to 24 months, so if you think you will need more time to pay the debt, you may need to factor in additional interest charges when the interest-free period ends.

Whether or not a balance transfer is the right debt payment solution will depend on your personal circumstances. Check our balance transfer calculator if you want to work out how much a balance transfer could save you in interest payments.

Your credit score

The advantage of a good credit score cannot be underestimated in this situation.

When applying for a balance transfer credit card, the company will check your credit score. Based on this score, they could refuse your application.

Even if you are accepted, if you have a bad credit score they could reduce your credit limit. Ultimately, this will determine the benefit of a balance transfer as a suitable debt payment solution.

If you think your credit score might be a problem, it’s worth checking with the credit reference agencies before applying. That way you can avoid any nasty surprises.

There are three main consumer credit reference agencies in the UK. They are Equifax, Experian and TransUnion (Noodle).

Alternative solutions to balance transfers

You could still use a balance transfer even if the size of your debt is bigger than the credit limit.

Transferring part of the debt would enable you to benefit from any interest-free period, where applicable.

Alternatively, if you have multiple debts, you could consolidate all of your debts so that you can make a single regular payment. If necessary, you could do this using an unsecured personal loan over a period longer than 24 months.

Take home

Look at your own personal circumstances with a critical eye. Remember that you need to factor in living expenses when thinking about how long it will take you to pay off your debt.

Balance transfers are a useful method for debt repayment, but be aware that credit cards are an expensive way to borrow money. Take full advantage of any 0% deals wherever possible. Check out our list of the best 0% credit cards.


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Turn credit declines into a win-win | 2020-11-20

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The pandemic has left millions of people needing credit at a time when lending standards are tightening. The result is a lose-lose situation—the consumer gets a bad credit decline experience and the credit union misses out on a lending opportunity. How can this be turned into a win-win?

The case for coaching

Let’s start by deconstructing the credit decline process: The consumer is first encouraged to apply. The application process can be invasive, requiring significant time commitment and thoughtful inputs from the applicant.

After all that, many consumers are declined with a form letter with little to no advice on actions the applicant can take to improve their credit strength. It is no wonder that credit declines receive a poor Net Promoter Score (NPS) of 50 or often much worse.

On the flip side, forward-looking credit unions provide post-decline credit advice. This is a compelling opportunity for several reasons:

  • Improved customer satisfaction. One financial institution learned that simply offering personalized coaching, regardless of whether or not consumers used it, increased their customer satisfaction by double digits.
  • Future lending opportunities. Post-decline financial coaching can position members for borrowing needs even beyond the product for which they were initially declined.
  • Increased trust. Quality financial advice helps build trust. A J.D. Power study noted that, of the 58% of customers who desire advice from financial institutions, only 12% receive it. When consumers do receive helpful advice, more than 90% report a high level of trust in their financial institution.

Provide cost-effective, high-quality advice

AI-powered virtual coaching tools can help credit unions turn declines into opportunities. Such coaches can deliver step-by-step guidance and personalized advice experiences. The added benefit is easy and consistent compliance, enabled by automation.

AI-based solutions are even more powerful when they follow coaching best practices:

  • Bite-sized simplicity. Advice is most effective when it is reinforced with small action steps to gradually nurture members without overwhelming them. This approach helps the member build momentum and confidence.
  • Plain language. Deliver advice in friendly, jargon-free language.
  • Behavioral nudges. Best-practice nudges help customers make progress on their action plan. These nudges emulate a human coach, providing motivational reminders and celebrating progress.
  • Gamification. A digital coach can infuse fun into the financial wellness journey with challenges and rewards like contests, badges, and gifts.

Virtual financial coaching, starting with reversing credit declines, represents a huge market opportunity for credit unions. To help credit unions tap into that opportunity, eGain, an award-winning AI and digital engagement pioneer, and GreenPath, a leading financial wellness nonprofit, have partnered to create the industry’s first virtual financial coach. To learn more, visit egain.com.

EVAN SIEGEL is vice president of financial services AI at eGain.

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