Stock Market

Why Rs 25000cr bank recap figure is enough: Leo Puri

Reacting to the market’s rally on Tuesday, Leo Puri, MD of UTI Asset Management Company, said that the government’s decision to stick to the fiscal deficit target has provided confidence and net flows have been positive from retail investors.

Commenting on yesterday’s Budget announcements, Puri told CNBC-TV18 that the allocation of Rs 25000 crore for refinancing the banks is enough as banks are not ready to absorb a huge amount productively at the moment.

Below is the transcript of Leo Puri’s interview with Latha Venkatesh and Nigel D’souza on CNBC-TV18.

Latha: Do you get the sense that the Budget has allayed fears? It was followed by a volatile, but largely green performance yesterday and a fairly gigantic rally today? Is investor sentiment any better?

A: Absolutely. In fact, yesterday I was focusing more on the currency and fixed income markets than just the equity markets because there are better bellwether frankly, of the medium-term impact of the Budget exercise and you could see immediate positive action there. Bond yields falling, currency strengthening and that has continued today. So, a huge thumbs-up frankly from currency and fixed income, and I think the equity markets are really following that with a lag today.

Latha: What were your comments on the banking sector itself since you wear a banking expert’s hat as well from your McKinsey days? Do you think the recapitalisation number was a disappointment or do you think that is made up by the appointment of Vinod Rai as the chairman of the Banking Boards Bureau?

A: Actually, I am seeing a much deep plan if you like, as regards the banking sector announcement. I am not at all disappointed by the Rs 25,000 crore number. In fact, I would have been disappointed had we committed yet more tax payers money, prematurely to something of a black hole, if you like in the banking system, before it is ready to absorb it productively.

And what I am actually seeing is a complete harmony at this point between the Reserve Bank with asset quality review (AQR) process and the Finance Ministry working on reforms to actually ensure that we have absorptive capacity in the banking system before committing any more capital.

Two very important indicators of this in the Budget. One was the reference to the willingness to go below 50 percent in the case of IDBI Bank which I certainly view as a leading indicator again of the governments intentions more broadly. And the other was talk of consolidation and restructuring which suggests that there is going to be pressure on the banks to improve themselves before any more government money is put in and potentially, they may have to go through their own resources, through asset sales, productivity improvements and eventually face the harsh light of private capital markets if they are going to capitalise.

I also read a statement that Finance Minister made post the Budget that questioned whether we needed quite so many public sector banks. Of course, there is still a need for some anchor banks, but surely we do not need 70 percent of our lending base to continue be in public sector hands.

So, I actually see the positive in the decision to restrict this number, because it is a sign of much stronger discipline and hopefully accelerated reforms. And actually Vinod Rai’s appointment is a very positive indicator in terms of the tenor and tone of the Bank Board Bureau, he has a reputation for integrity. He has been secretary, Department of Financial Services and he is known to be someone who can move swiftly, decisively and clearly has the backing of the government at this point in time. So, I am very optimistic about that.

Nigel: I wanted a couple of details. In the past you have said that you expect the equity mutual fund industry to outpace returns on risk free assets by close to around 5 percent. How have the systematic investment plan (SIP) flows been in this crash? Have you seen more amount of redemptions? Could you give us a sense and also, what kind of contribution comes in from SIPs to the total UTI Mutual Fund basket?

A: Actually, generally, the retail investors have shown remarkable resilience over the last 6-8 months of volatility. Volatility has not been a recent phenomenon. It has been for several months now. And certainly until last month, flows have been positive. All the data suggests that we still had positive net flows from the retail base.

And SIP is today, about Rs 2,500 crore or so are coming in to the industry from retail investors. Indeed, that is one of the factors underpinning the markets even as FIIs withdraw. So, when I said that 5 percent outperformance over risk free assets, it is obviously, got to be looked at over a period of time. It is established by empirical analysis over almost any time period you look at and it will absolutely continue.

Nigel: Rs 2,500 crore is coming in from SIPs, what exactly is that percentage, to the total contribution to the total fund size?

A: At the moment, the industry has about Rs four lakh crore of equity and as stock, but flows have been between Rs 60,000-80,000 crore a year over the last couple of years. So, it is still a small percentage and we would like to see it rise.

But, you must remember, high networth investors (HNI) on the whole continue to prefer lumpsum investing and continue to believe that they can time the market and of course, there are some who believe that if you have the risk appetite and the cash available then why not time the market.

And that is true for that profile of investors. But for the core household, the retail household, systematic investing is certainly a better route, but for the adventurous high networth investor with cash available to allocate, they are welcome to try and time the market and that is the preferred route taken by HNI investing in India at this point.

Latha: I do not know if you keep day to day and hour to hour and minute to minute touch with your dealing room, but this is a monster rally that we have on our hands today and it came out of nowhere practically. Asian markets are in the green, but about half a percent, nothing like the 2.5 percent that we have managed. Is the dealing room sensing that this is some serious long only buying of India? Has interest returned? After all, we were stark underperformers this quarter, year to date.

A: I think the confidence provided by the decision to stick to the fiscal discipline and the path we had laid out earlier cannot be overestimated. Right through yesterday evening, all the reports I read from around the world emphasise this was the single most important element of the Budget that investors around the world were focused on and it has helped India stand out uniquely.

We are the only significant market. Frankly, not just emerging market, but even if you look at markets in Europe, they have struggled to actually maintain this path. Investors really like this.

Second, they have understood that underpinning the Budget and assuming the expenditure is widely used and properly targeted, you actually have the beginning of an investment and consumption mini boom that might actually get triggered over 18-24 months with a very positive impact on earnings. And I think there is at this stage, at least the early responses to give the benefit of the doubt that we will use this money wisely.

So, fiscal probably, commitment to creating a certain amount of demand momentum through the targeted infrastructure spend that is outlined in the Budget. Now, how long will that sustain, can that overcome the negative overhang of China and potential uncertainties in the US? To be honest, I am not sure that we can, and I would enjoy this while it lasts.

Latha: A rate cut by end of day today?

A: I do not know. That would be a little out of character. I would not rule it out. I think they may well choose to wait for the regular schedule. I know that people are hungry for the rate cut. It would be a symbolic act.

I am not sure a 25 basis point rate cut would add very much to the investment cycle or anything else. But there is a lot of speculation. My own perception is still that we will see it when they meet as opposed to in an emergency fashion.