Money sloshing around financial assets lowers capital cost: VCCircle LP Summit
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More and more savings dodging physical assets for financial ones, such as bonds, has bumped up the supply of money and brought down its cost, said panellists at the VCCircle India Limited Partners Summit in Mumbai on Wednesday.

Prasun Gajri, chief investment officer at HDFC Standard Life Insurance Co., said corporate companies and groups are increasingly tapping the bond market for credit, which has led the banks to look at small and medium enterprises (SMEs) for lending growth.

Another panellist, Sujan Hajra, chief economist, executive director, institutional equity, brokerage Anand Rathi Securities, said more and more savings going into financial instruments such as bonds instead of physical assets has increased money supply, bringing down its cost. As a result, corporate funding from banks, which accounts for 75% of total lending by them, has come down to about 20%, as companies chase the increased supply of money sloshing around the corporate bond market, Hajra added.

The corporate lending gap has forced banks and other new-age non-banking financial companies to focus on SMEs as well as last-mile requirements, and cost of capital for such entities has come down by a couple of 100 basis points, he added.

The panellists also acknowledged that, while real and nominal fall in cost of capital has its own impact on growth, the political risks posed by the results of impending national and state elections may result in a market blip.

The panel comprising economists and investment officers also saw Gajri sharing his optimistic view that there are enough indicators to show an impending turnaround in the market.

Although cash flow is back to pre-demonetisation levels, he said this would boost capital expenditure. Echoing Hajra, he added that corporates are increasingly tapping the bond market for credit, forcing the banks to look at SMEs for their lending growth.

Offering his views on economic growth, another panellist Saurabh Mukherjea, chief executive at Mumbai-based brokerage Ambit Capital, said it would be difficult to sustain a 7% annual gross domestic product (GDP) rate over three to five years. He reasoned that over the last 20 years, India grew an average 7.5% annually whenever the yearly investment rate was 12% or more, because half of the growth is down to investment and capital expenditure.

At the current yearly investment rate, if the Indian GDP growth is less than 5% for a year, it won't be surprising, he added. Mukherjea also cited problems for the economy such as slow sales volume growth of FMCG (fast-moving consumer goods), lack of jobs in consumer and labour-intensive businesses, and export of jobs to cheaper labour markets such as Bangladesh.

Cement and truck sales, he said, incubate a recovery but lack of jobs and lower capacity use are alarming.

On the employment front, Hajra countered Mukherjea by saying that job creation gets major contributions from retail trade and agri-ancillary services rather than from the construction sector.

About half of the 550 million working population is in agriculture and they look for an opportunity to move to other sectors but meet with little success in doing so, Hajra said. Another area that has scope to create more jobs is tourism, he added.

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