Reliance Industries in trouble?

Reliance Industries in trouble?

Reliance Industries' corporate debt has ballooned to around Rs. 1.60 lakh crores and rising. The company borrowed tremendous amounts of money over the last few years and their debt doubled in the same period [1]

Many companies borrow to fund future growth, but Reliance ended up investing its borrowed money in oil reserves, petrochemicals and shale gas reserves. The prices of all of these have gone down significantly and thus Reliance is not generating enough revenue. Last year, for example, saw Reliance's operating revenue go down by Rs. 60,000 crores. Their debt however increased from 1.38 crores to 1.60 lakh crores [2]

Even though RIL has shown that they are making profit, it is highly suspect if they are making enough money to pay off long term debt. Companies have a habit of manipulating numbers to show profit. The revenue numbers however, don't lie.

The big question now is - if Reliance Industries defaults on its loans (high likelihood), will the Government bail them out, or will they aggressively go after their assets after forcing them to file for bankruptcy?

Keep in mind, RIL's assets include the highly controversial KG-gas basin.

The debt bomb is affecting many other Indian companies who greedily went after cheap loans and are now feeling the heat [3]

The international monetary fund has already warned that high corporate debt can destabilize our otherwise healthy economy [4]

References -

[1]http://www.dnaindia.com/money/report-reliance-s-debt-went-up-by-nearly-rs-10000-crore-even-as-it-posted-7-year-high-profit-2107935
[2]https://www.valueresearchonline.com/stocks/Finnance_Annual.asp?code=3252
[3] http://www.businesstoday.in/magazine/cover-story/massive-corporate-debt-may-slow-down-economic-recovery/story/217700.html
[4]http://www.livemint.com/Companies/z4M2jlVmUwrLMTegUZE2wM/Concentration-of-high-debt-among-some-Indian-firms-may-pose.html

The Reserve Bank of India (RBI) today granted in-principle nod to 11 payment banks applicants.

RBI grants in-principle nod to 11 cos for payment banks. The central bank has approved applications of National Securities Depository Limited (NSDL), Reliance Industries, Aditya Birla Nuvo, Airtel M Commerce among others.

A payment banks differs from conventional banks as it cannot lend to its customers. It is allowed to take deposits, allow remittances and provide simple financial products.

Name of other applicants that have received nods:

- Department of Posts

- Fino PayTech

- Tech Mahindra

- Vodafone m-pesa

- Cholamandalam Distribution Services

- Paytm's Vijay Shekhar Sharma

- Sun Pharma's Dilip Shanghvi.

The RBI's “in-principle" approval will be valid for a period of 18 months, during which time the applicants have to comply with the requirements under the Guidelines and fulfil the other conditions as may be stipulated by the central bank.
These companies selected will be given "in-principle" approval for 18 months, after which they will be given licences if they fulfil all conditions stipulated by the RBI.

A total of 41 companies had applied for the permit, the RBI said, adding "some of the entities who did not qualify in this round, could well be successful in future rounds."

Payments banks can accept deposits of up to Rs 1 lakh and can offer current and savings account deposits. They can also issue debit cards and offer internet banking. But they are not allowed to lend or issue credit cards.

They are part of India's financial inclusion push, meant to bring banking services to a country where less half the adult population has a bank account.

Dos of payments banks

* Has to use the word ‘Payments Bank’ in its name to differentiate from other banks

* Accept demand deposits, i.e., current deposits, and savings bank deposits from individuals, small businesses and other entities

* To hold a maximum balance of Rs one lakh per individual customer.

* Will be allowed to set up branches, ATMs, BCs

* Allowed to issue debit cards also offer internet banking

* Can accept a large pool of money to be remitted but at the end of the day the balance should not exceed Rs one lakh

* Can accept remittances to be sent to or receive remittances from multiple banks

* Permitted to handle cross border remittance transactions in the nature of personal payments / remittances on the current account

* Allowed to distribute mutual fund products, insurance products and pension products

* Bank can also undertake utility bill payments

Don’ts of payments banks

* No NRI deposits should be accepted    

* Cannot issue credit card

* Not allowed to set up subsidiaries to undertake non-banking financial services activities    

* Other financial and non-financial services activities of the promoters should not be mingled with the working of payment banks