What investors should do? HDFC AMC has renewed the FMP by 12 months. Kotak AMC is facing the payment issues for its FMP due to exposure to ZEE and other companies. SBI has taken over JET. LIC has taken over IDBI BANK. Many PSU banks have been merged. Where are we heading looking at these incidents? If you look at the govt. statistics, everything is the best. They have given the first installment of Rs.2000 to the farmers and things like that. But if you just go little deep you will find that ………
1. Banks are doing businesses other than banking – SBI is flying planes of JET!!
2. Insurance companies are running BANKS!!
3. Mutual fund investors are getting a promise to get their money as and when the lenders give money back to mutual funds.
4. Your customers are promising you that they will send money for their overdue payments.
In short, the above is an illusion that everything is OKAY. Banks are feeling safe now, but the end results will be more negative than what it appears today. What does it MEAN for BANKING and NBFC stocks?
Long back BUFFETT had said he would never invest in BANKS. Today 61% of BUFFETT portfolio is into 5 banks or financial companies!! Buffett has a problem of plenty of money and he would have got these companies by force or by choice. His plus point is that he is in the USA, where the Helicopter BEN printed new money and recapitalised all banks.
In India – those who had invested in now-defunct UTI guaranteed schemes – had not got a single penny as per the promise. US – 64, the star performing fund, had lost lakhs and crores of the small and HNI investors. We have seen what happened to GLOBAL TRUST BANK – now taken over by Oriental Bank of Commerce. There is a small bank in Mumbai – KAPOL Co-Op Bank. The bank
is closed by RBI and now the deposit holders are not getting their full money.
Today LIC money is considered 100% safe as it is guaranteed by parliament law. I am unable to see how LIC will pay to all the policyholders – the way it is being asked to invest by CENTRAL Govt in PSU dis-investments or taking over sick banks.
Private insurers are chasing return in the form of Unit Linked plans. The way Mutual Fund guys have lost in DEBT funds, I am seeing the same thing would be happening in Private Insurer's investments also.
So, banks, mutual funds, and insurance companies are going to face the heat of BANKRUPTCY going forward.
The FUNNY aspect of solving Bankruptcy?
Most of the companies are being sold at 20-40% of the loan amount. Now, to pay that 20-40%, the taking over companies are taking new loans to pay to the banks. Let us say Tata Steel took over Bhushan steel. Now, the banks got 40% from the Tata Steel. But Tata Steel didn't have the cash to pay
that. So, banks gave a loan to TATA STEEL. Technically, what happened is BANKS lost 100% of the BHUSHAN and paid another 40% to TATA to take over BHUSHAN. (one may argue that TATA STEEL will return the capital some day and pay the interests regularly – but today BANKs had to top up the loan by 40% !!)
My Marwari friend used to say a very good saying in their language on this scenario. He says "Sau(100) ke HUE SAATH(60). Aadhe gaye NAATH. 10 de denge. 10 dilwa denge or 10 me kya lena or dena. Meaning of this is – from Rs.100, they decided to give Rs.60. Now they say they can give only Rs.30. From that Rs.30, He will give Rs.10, he will ask somebody to pay Rs.10 and now don't cry for Rs.10 which is the balance. It means all Rs.100 gone.
This by accounting standards is a perfect deal and makes the balance-sheets of banks looks strong.
In this kind of deals – the deal makers make the hefty commissions for finding a suitor for sick companies. This is an additional cost to the banks or financial institutions. What NEXT?
We all are sitting on a CREDIT TIME BOMB. The clock is ticking. Modi solved the problem with PSU unit's money by taking the dividends or by making them buy sick units shares holding or by merging banks. Unless the real economic growth does not come, these temporary solutions will not last long.
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