The problem of Non-Performing Assets (NPAs) has been hindering the growth of the financial system of India for around a decade now and the attempts to solve this problem have been continuously made by the finance ministry, the RBI and the banking system as a whole. The latest attempt was proposed by a committee headed by Punjab National Bank (PNB) chairman Mr. Sunil Mehta on 2nd July 2018. This is the ‘Inter-Creditor Agreement’ (ICA) under Project Sashakt, which is a bank-led bad loan resolution plan for the speedy resolution of stressed assets. According to the proposed plan, lead banks, having the highest exposure to stressed assets, will prepare a well-framed resolution plan with the help of resolution experts. This plan would then be screened by the Indian Banks’ Association (IBA) and would require the approval of IBA as well as 66% of the member banks of the committee. Post the approval, the lead bank would be responsible for the proper execution of the revival plan for the stressed assets. However, this arrangement only applies to bad loans worth INR 50-500 crores.
The recent Monetary Policy Review saw Reserve Bank of India’s first rate hike in more than four years, a change in stance that saw 10 year benchmark G-sec yield almost touching the 8% mark for the first time in 3 years (since June 2015). The 10-year benchmark G-sec acts as a fair indicator of the investors’ sentiment of the Indian fixed income market. The benchmark yield has seen the steepest per year increase in yield in recent times with ~180 bps hardening since the trough of 6.18% achieved in November 2016.
Domestic debt market has been primarily dominated by Government securities. In FY17-18, the amount outstanding in Government securities reached Rs. 53.2 trillion representing a sizeable market share of ~65% in sovereign debt market (constituting G-secs, T-bills and State Development Loans) and ~45% in the entire Indian fixed income market. With an average ~30% share of secondary market trades in the Indian G-sec market, the ‘on-the-run’ 10-year benchmark G-sec represents the most liquid maturity segment of the G-Sec market.
The NIFTY 10-year Benchmark G-Sec Index captures the price change and accrued interest of on-the-run 10-year G-Sec. Additionally, NIFTY 10-year Benchmark G-Sec (Clean Price) Index captures only the price change of ‘on-the-run’ 10-year G-Sec.
Exhibit 1: Performance of NIFTY 10-year Benchmark G-sec index during various phases
*Data ended June 7, 2018
#Returns reported during Phase 3 are absolute returns for the 5 month period from August 2008 to December 2008.