Good morning. India’s central bank, the Reserve Bank of India (RBI) has repeatedly expressed concern over the rise of consumer loans. The concerns aren’t unfounded. We, at The Core, have previously reported on how youngsters in India are living on cycle of consumer loans to keep up a standard of living. But that’s not all. Many are also borrowing to invest money in the markets, and that sets a problematic precedent. Read on to know more. 

In other news, rains in north India are playing spoiltsport for quick commerce logistics. Meanwhile, India’s smartphone market sees significant growth in the first half of 2024.

THE TAKE

Borrowing To Invest Is Becoming A Global Phenomenon, And It’s Unlikely To End Well

In January this year, journalist Tamal Bandyopadhyay in an insightful column recounted how he asked a group of youngsters in a bar in Kolkata how they could afford to pay for the somewhat pricey drinks. They replied - none of them had jobs and they were borrowing money on loan apps - as low as Rs 1,500.

They also usually repaid the loans with earnings from tuition fees or giveaways from their parents. And they repaid quickly and thus kept their credit scores high. A host of crackdowns by India’s central bank, the Reserve Bank of India (RBI) across the financial sector this year has revealed such borrowings at all levels. 

The big one is what is known as unsecured loans — small loans for which there is no collateral — including credit cards. In March, the RBI asked IIFL Finance to stop sanctioning or disbursing new gold loans over concerns about the company’s gold loan portfolio. There were doubts about the quality of gold deposited with IIFL to take loans. This is shocking as it means that people were depositing substandard gold to take loans. It also means that the lender was not checking the quality of gold properly. There are many such examples, particularly of small loans taken by individuals. 

The reasons for taking such loans could be many, one of them is also investing in the market in general or in many cases in dangerous derivatives products like futures and options. 

India has the world’s largest derivatives market now. Bloomberg says India’s futures and options turnover hit a record $6 trillion in February, from less than $150 billion five years ago. 

A large part of this growth followed the introduction of weekly-expiring contracts in 2019, replacing the traditional month-end expirations. The RBI is on record to express concern in general terms about savings going into derivatives, an area where nine out of 10 traders, as per official data, lose money.

It is my experience that RBI’s general comments usually have very specific data behind them. The Wall Street Journal carried an article saying investors borrowed like crazy during the rally and now they are paying the price. The headline might make you feel there are like-minded youngsters sitting in the US as well.

Well, yes and no.

This article speaks of large, institutional investors and how the market meltdown in recent weeks has been driven by the rapid unwind of several popular trades and the heavy use of leverage. Translated, whether it was the boys in the Kolkata bar or the smart and savvy suited Wall Street investors, they were doing roughly the same thing.

Of course, the interest rates vary. 

Investors were borrowing Japanese Yen at close to 0% interest and investing elsewhere in stocks and bonds. They got shocked out of their wits when the Bank of Japan raised interest rates to 0.25% and ran for the door to start selling. This triggered a shockwave last week that enveloped Indian markets as well.

In the case of the small borrowers, the rates could be between 30 and hold your breath, 60% an annum.

Meanwhile in India, the credit deposit ratio is a concern. Deposits into savings accounts are not growing as fast as banks are giving out loans. A healthy gap between the two should be there but it isn’t and the RBI once again has been consistently referring to this, including last week.

The RBI is exhorting banks to step up deposit mobilisation, which of course will work only up to a point. Savings have reduced because people are buying homes but also putting money into stock markets through mutual funds if not directly. A key reason for all this is that incomes are clearly not growing enough to keep pace with aspirations.

In many cases, there may be no income at all. Where there are incomes, even if growing steadily, inflation is eating away at an unprecedented pace.

That is where things are, but the solution to high inflation, low incomes and high aspirations cannot be borrowing to invest.

Borrowing to invest is a dangerous phenomenon for any investor, large and small. Usually, it ends badly and only the smartest can get out in time. Most will not.

CO:Relation

LIC’s Hindenburg Hit Won’t Be Long Term

The latest Hindenburg reports on the Adani Group has done a number on the Life Insurance Corporation of India (LIC). The biggest insurer in India has over Rs 55,000 crore of investments in the Adani Group companies. LIC shares have been at the receiving end since Monday. The intensity of the fall in LIC India scrip was more than that of shares of the Adani Group companies. LIC fell by 10% in just two days while the Adani Group company shares have recovered most of the losses.

But should that worry investors? The answer is no. LIC promises to invest Rs 1.30 lakh crore in Indian equities in 2024-25. The amount is enough to provide India’s stock markets a cushion if there is a global selloff. Also, considering the over Rs 12 lakh crore equity assets under management (AUM) of LIC, the Adani group investment is not so significant. It will not be a bad thing for long-term investors looking to buy a market leader in the insurance sector.

PODCAST

Markets Fall On Weak Signals

On Episode 363 of The Core Report, Financial Journalist Govindraj Ethiraj talks to Manish Gupta, Senior Director and Deputy Chief Ratings Officer at CRISIL Ratings.

CORE NUMBER

69 million

This is the total market value that was wiped off Adani Group’s stocks at the This is how many smartphones were shipped from the Indian market in the first half of 2024, a growth of 7.2% year-on-year. The report International Data Corporation’s (IDC) Worldwide Quarterly Mobile Phone Tracker also showed that while Apple and Samsung performed well in the affordable phones segment, Vivo and Xiaomi led the budget category. Vivo continued to lead over all as well, for the second quarter in a row, with new launches across price segments. 

FROM THE PERIPHERY

—🛵 While the monsoons brought much relief from this year’s harsh north Indian summer, quick commerce logistics can’t seem to catch a break. Heavy rains and waterlogging across the region have led to significant disruptions, order cancellations and delivery delays across hundreds of pin codes. Roadblocks have stalled fresh supplies, and delivery riders are struggling, according to a Business Standard report. The downpour has also slashed foot traffic at restaurants, with Delhi-NCR seeing up to a 50% drop in business. With more rain expected, further disruptions will likely impact Delhi-NCR, Rajasthan, and Punjab.

—📦 Speaking of logistics, e-commerce companies are diving into the rapid delivery market, aiming to bring orders to your doorstep in just a few hours. According to a report by The Economic Times, players like Ecom Express, Shadowfax and Loadshare have joined the quick commerce trend, driven by growing order volumes. Delhivery, already working with Swiggy Instamart, plans to open shared warehouses to enable same-city deliveries in two to four hours. Though this isn’t as fast as Zepto or Blinkit’s 10-15 minute delivery, the race is on!

—🔙 Recalled! In a rare instance, the Competition Commission of India has ordered the recall of reports of an investigation into Apple’s breach of competition laws which began in 2021. This is because Apple believes that the reports give its rivals, like Tinder-owned Match and Indian fintech Paytm, access to confidential data about revenue of its India app store and figures on market share. The reports had found Apple to be guilty of exploiting its dominant position in the market which forced developers to use its proprietary in-app purchase system. 

—📈 International Monetary Fund’s executive director, Krishnamurthy V Subramanian, said that the power of compounding can take India’s economy to a whopping $55 trillion mark by 2047. Here’s his math - “With a 12% annual growth rate for the dollar — comprising 8% GDP growth, 5% inflation, and a 1% depreciation of the rupee against the dollar — GDP is expected to double every six years”. He said that four such rounds of doubling would take India’s current $3.25 trillion economy to the ambitious mark. 

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