Crude Oil - Impact of Fall in prices in Indian Economy – Falling Prices impact Favourable OR Adverse

क्रूड ऑयल, कीमतें घटने का कहां पड़ता है असर - कच्चे तेल की कीमतों में गिरावट से सिर्फ फायदा नहीं

Crude oil Prices

Crude Oil is a commodity whose prices are governed globally. Economy of various countries is solely dependent on the price movement of crude oil. The rise and fall in the prices of crude oil impacts the lively hood of common man. This not only impacts the GDP growth of the country but for some of the countries particularly the Gulf countries this is the only source of Income for the country. On an average 924 lacs Barrel Crude oil is consumed globally of which share of consumption by the countries such as China, America, Japan and our country India is more. India ranks among the top 10 largest oil-consuming countries. India faces a large supply deficit; it imports about 70% of its total oil consumption and makes no exports. The oil reserves of the country are located primarily in Mumbai High, Upper Assam, Cambay, and the Krishna-Godavari and Cauvery basins. Crude oil plays a vital role in the Global Economy.

What is Crude Oil
Naturally available raw oil is known as Crude Oil. It is a Black coloured thick viscous fluid. It is a type of Dark Hydrocarbon matter found globally beneath the earth surface and/or sea available since past 30 crore years. It takes minimum 20 gallon gasoline to prepare one Barrel. Crude oil measurement is done in Barrels and one Barrel is equivalent to 159 litres.
CRUDE OIL UNITS 
1 US barrel = 42 US gallons. 
1 US barrel = 158.98 litres. 1 Gallon = 3.79 litres
1 tonne = 7.33 barrels. 
1 short tonne = 6.65 barrels. 
Note: barrels per tonne vary from origin to origin.

The Processing / Refining of crude oil is done in Oil Refinery through Fractional Distillation and we get by-products such as  Kerosene, Petrol, Diesel, Natural Gas, Vaseline, Lubricants

Types of Crude Oil

Crude Oil is of three types – Brent Crude, WTI. and Shale oil. Brent Crude is traded in London-UK and WTI  and Shale oil in USA. In India Brent crude oil is imported. In India Trading of Brent Crude is done.

Brent Crude
Brent Crude oil, extracted from the North Sea, is a sweet light crude oil with less than 0.4% of sulphur and an API gravity of 30 °API. It is light because of its relatively low density, and sweet because of its low sulphur content. In fact these are the two main characteristics by which crude oil are classified-sulphur content and density-which the petroleum industry measures by its American Petroleum Institute (API) gravity. Brent Crude is a mix of crude oil from 15 different oil fields in the North Sea and comprises Brent Blend, Forties Blend, Oseberg and Ekofisk crudes. The Brent Crude benchmark is known as the Brent Blend, London Brent, or Brent petroleum. 

Brent is the leading global price benchmark for Atlantic basin crude oils. Originally, Brent Crude was produced from the Brent oilfield. The name ‘Brent’ comes from the naming policy of Shell UK Exploration and Production, which originally named all its fields after birds (in this case the Brent goose). 

West Texas Intermediate (WTI)
West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. This grade is described as light because of its relatively low density, and sweet because of its low sulphur content.It is the underlying commodity of New York Mercantile Exchange's oil futures contracts.

The price of WTI is often referenced in news reports on oil prices, alongside the price of Brent crude from the North Sea. Other important oil markers include the Dubai Crude, Oman Crude, Urals oil and the OPEC Reference Basket. WTI is lighter and sweeter than Brent, and considerably lighter and sweeter than Dubai or Oman. WTI is used in making low sulfur gasoline and low-sulphur diesel.

Crude Oil Production - Millions of barrels per day(MBD)

S. No.	Country	MBD
1	USA	13.7
2	Saudi Arabia	11.9
3	Russia	11.0
4	China	4.6
5	Canada	4.4
6	Iraq*	4.0
7	UAE	3.5
8	Iran*	3.4
9	Mexico	2.7
10	Kuwait	2.7

OPEC countries combined together have 40% plus share approx 63% in Global Oil Production.
Source: US Energy Information Administration; Data includes crude oil, lease condensate, natural gas plant liquids, and refinery processing gain; Updated Feb. 11, 2016.

Given the high volatility in oil prices, risk management techniques are of utmost importance for market participants, such as producers, marketers, processors, and industries. Amidst uncertainty, modern techniques and strategies, including market-based risk management financial instruments like ‘Brent Crude Oil Futures’, offered on the MCX platform can improve efficiencies and consolidate competitiveness through price risk management. A third type of Oil is Shale Oil - Difference between Oil Shale, Shale Oil & Shale Gas:- Shale gas: It is basically natural gas which is extracted by the process of fracking. Countries like USA and China are using this method. Oil Shale: Oil shale is the raw material for producing Shale Oil. It is organic rich rock from which shale oil is extracted. 3. Shale Oil: Shale oil is the oil produced from oil shale. It is a substitute for conventional crude oil. There has been a tremendous increase in the shale oil production in the recent years. It causes land pollution. For Details Please click on following Link: What are shale oil, shale gas and oil shale? and What is Shale Gas? What is OPEC Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental organization of 13 petroleum-exporting nations, founded in 1960 by the first five members, and headquartered since 1965 in Vienna, Austria. The 13 countries account for 40 percent of global oil production and 73 percent of the world's "proven" oil reserves, making OPEC a major influence on global oil prices. OPEC's stated mission is "to coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets, in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry."  OPEC's members are Algeria, Angola,Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia         (the de facto leader), United Arab Emirates, and Venezuela. Two-thirds of OPEC's oil production and reserves are in its six Middle Eastern countries that surround the oil-rich Persian Gulf. The formation of OPEC marked a turning point toward national sovereignty over natural resources, and OPEC decisions have come to play a prominent role in the global oil market and international relations. The effect can be particularly strong when wars or civil disorders lead to extended interruptions in supply.

MARKET INFLUENCING FACTORS ·         OPEC output and supply. ·   Terrorism, weather, war and any other unforeseen geopolitical factors that causes supply disruptions. ·         Global demand particularly from emerging nations. ·         Dollar fluctuations. Much of the economy depends on oil. This is why prices of oil matter to almost every economy. Global crude oil prices are down nearly by 60% this year to $40 per barrel-levels from $110 / barrel at the start of the year. This has caused a crisis in countries like Russia, which depends on oil exports.

India is the IVth largest country to import crude oil. Around 35 lakh Barrels per day consumption is estimated for India. India’s growth story hovers around the import of oil as India imports 80% of its crude requirements. Any negative change in the crude oil price has an immediate positive impact on the increment in the GDP and IIP. A one-dollar fall in the price of oil saves the country about 40 billion rupees. Oil is one of the most important commodities in recent times.

Fall in Oil prices affect India in following ways:

Current account balance:

India is one of the largest importers of oil in the world. It imports nearly 80% of its total oil needs. This accounts for one third of its total imports. For this reason, the price of oil affects India a lot. A fall in price would drive down the value of its imports. This helps narrow India's current account deficit - the amount India owes to the world in foreign currency. A fall in oil prices by $10 per barrel helps reduce the current account deficit by $9.2 billion, according to a report by Live mint. This amounts to nearly 0.43% of the Gross Domestic Product - a measure of the size of the economy.

Inflation:

Increases price of Goods and services ie. Rail, Road and Air Fares. Oil price affects the entire economy, especially because of its use in transportation of goods and services. A rise in oil price leads to an increase in prices of all goods and services. It also affects us all directly as petrol and diesel prices rise. As a result, inflation rises. A high inflation is bad for an economy. It also affects companies - directly because of a rise in input costs and indirectly through a fall in consumer demand. This is why the fall in global crude prices comes as a boon to India. Every $10 per barrel fall in crude oil price helps reduce retail inflation by 0.2% and wholesale price inflation by 0.5%, according to a Money control report. The fall in Inflation leads to reduced Transportation costs which in turn will lower price of Air, Railway and Bus fares. It also helps in reducing the prices of consumer durables, fruits and vegetables etc. The prices of paints, plastics, fertilisers, shipping etc. will also come down.

Oil subsidy and fiscal deficit:

Even it affects the PSU Oil Cos. profitability, in case of Diesel Prices which is deregulated,The PSU Cos have to buy more Dollars ($) to pay its Bills.The government fixes the price of fuel at a subsidized rate. It then compensates companies for any loss from selling fuel products at lower rates. These losses are called under-recoveries. This adds to the government's total expenditure and leads to a rise in fiscal deficit - the amount it borrows from the markets. A fall in oil prices reduces companies' losses, oil subsidies and thus helps narrow fiscal deficit. However, since diesel was recently deregulated, the fall in oil prices will likely have less effect on the government's fiscal deficit. Moreover, the government still has to pay for previous under-recoveries. Any benefit from the fall will be offset by payments for the past under-recoveries.

Rupee exchange rate:

The value of a free currency like Rupee depends on its demand in the currency market. This is why it depends to a great extent on the current account deficit. The fall in crude oil price is good for all users, including major importers like India, as it lowers their trade deficit and hence strengthens their currencies. A high deficit means the country has to sell rupees and buy dollars to pay its bills. This reduces the value of the rupee. A fall in oil prices is, thus, good for the rupee. However, the downside is that the dollar strengthens every time the value of oil falls. This negates any benefits from a fall in current account deficit.

Petroleum producers:

The fall in global oil prices may be beneficial to India, but it also has its downsides. Directly, it affects the exporters of petroleum producers in the country. India is the sixth largest exporter of petroleum products in the world, according to media reports. This helps it earn $60 billion annually. Any fall in oil prices negatively impacts exports. At a time when India is running a trade deficit - high imports and low exports, any fall in exports is bad news. Moreover, a lot of India's trade partners and buyers of its exports are net oil exporters. A fall in oil price may impact their economy, and hamper demand for Indian products. This would indirectly affect India and its companies. For example, the share prices of Bharti Airtel and Bajaj Auto fell because of the devaluation of the Nigerian currency - Naira. Both the companies have a significant presence in the African country.

Monetory Policy:

The decline in crude oil prices helps the Reserve Bank of India to cut interest rates during the credit policy review and thus helps in Growth of the economy.

Negative effects of Decline in Oil Prices

A high deficit means the country has to sell rupees and buy dollars to pay its bills. This reduces the value of the rupee. A fall in oil prices is, thus, good for the rupee. However, the downside is that the dollar strengthens every time the value of oil falls. This negates any benefits from a fall in current account deficit.

For the oil exporters, this is bad news as it lowers their export earnings, and given that most countries are dependent on oil exports, their growth would suffer. Domestic consumers might only see a small portion of their income "freed up" as the government's increase of excise duties on diesel and petrol mean that retail prices haven't fallen by as much in India as they have elsewhere.

The decline in the Crude oil prices has brought loss of approx 2 Lac crore to Oil exploration industry. These cos. are at a loss and are not able to meet their cost of production. The Cos. are facing the challenge of reducing their production. If these cos. Are not able to come out of this situation at the earliest they will be facing Bankruptcy like situation. International Energy Agency(IEA)  has warned of economic situations like that of Russia and Venezuela. The  IEA had predicted Crude oil demand at 9 lac BPD in 2015. Decline in crude oil prices means Less Income for the Exporting Country. Since the Decline of Oil prices will affect Global demand in International Market and in turn affect Exports from India

Current Outlook 

With crude oil prices rebounding since February 2016 to around US$ 40.00 per barrel the experts believe that oil prices may not remain at lower level for long and may hover around this level in near future.The OPEC is also making efforts to convince the oil producing countries to limit the output to check at least further fall in oil prices. However, the experts also stated that the oil demand will grow at 12% a year in next 5 years as compared to 17% annual growth during the period 2009-2015. The next meeting of OPEC with Non-OPEC members is scheduled on April 17th 2016 to arrive at a decision to Cap the Oil production limit. In the meantime Iran has also added additional oil supply to the market after the US lifted its sanction on Iran.

Source
- Mcx
- Kotak Mahindra Securities
- ET
- http://money.bhaskar.com/news-cppst/MON-EXPR-MARK-crude-oil-fall-impact-on-indian-economy-4933843-NOR.html
-http://www.forbes.com/sites/judeclemente/2015/08/07/indias-rise-to-3rd-place-in-oil-demand/

Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises (MSMEs)

The Reserve Bank of India has come up with a revised framework for revival and rehabilitation of Micro, Small and Medium Enterprises so that incipient sickness can be detected by banks in the units and a corrective action plan can be set in motion for them.

The revised framework, which supersedes RBI’s earlier guidelines on rehabilitation of sick micro and small enterprises, is applicable to MSMEs having loan limits up to Rs. 25 crore, including accounts under consortium or multiple banking arrangement.

"In order to enable faster resolution of stress in an MSME account, every bank shall form Committees for Stressed MSME," RBI said in a notification.  "Restructuring of loan accounts with exposure of above Rs 25 crore will continue to be governed by the extant guidelines on Corporate Debt Restructuring (CDR) or Joint Lenders' Forum (JLF) mechanism," the notification said. 

The committee will have to come up with a corrective action plan for the account, which shall look at rectification, restructuring, recovery and also additional finance if needed, the apex bank said.  Corrective action plan (CAP) may include rectification or restructuring. The RBI said before a MSME turns into a non-performing asset, banks should identify incipient stress in the account by creating three sub-categories under the special mention account (SMA).

Under the SMA-0 sub-category, principal or interest payment is not overdue for more than 30 days but account showing signs of incipient stress; SMA-1 (principal or interest payment is overdue between 31-60 days); and SMA-2 (principal or interest payment is overdue between 61-90 days).

On the basis of these early warning signals, the branch maintaining the account should consider forwarding the stressed accounts with aggregate loan limits above Rs. 10 lakh to the Committee (for Stressed Micro, Small and Medium Enterprises) within five working days for a suitable corrective action plan (CAP). Forwarding the account to the Committee for CAP will be mandatory in cases of accounts reported as SMA-2.

As regards accounts with aggregate loan limits up to Rs. 10 lakh identified as SMA-2, the account should be mandatorily examined for CAP by the branch itself under the authority of the branch manager / such other official as decided by the bank in terms of their Board approved policy.

However, the cases, where the branch manager / designated official has decided the option of recovery under CAP instead of rectification or restructuring, should be referred to the Committee for their concurrence.

Any MSME borrower may voluntarily initiate proceedings under this revised framework, if the enterprise reasonably apprehends failure of its business or its inability or likely inability to pay debts or there is erosion in the net worth due to accumulated losses to the extent of 50 per cent of its net worth during the previous accounting year, by making an application to the branch or directly to the Committee.

When such a request is received by lender, the account with aggregate loan limits above Rs. 10 lakh should be referred to the Committee. The Committee should convene its meeting at the earliest but not later than five working days from the receipt of the application, to examine the account for a suitable CAP.

The accounts with aggregate loan limit up to Rs. 10 lakh may be dealt with by the branch manager / designated official for a suitable CAP.

The RBI said the Board approved policy to operationalise the framework may be put in place by the banks not later than June 30, 2016.

Source: ET, Business Line & RBI Circular

For Further reading please click on the following RBI link :Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises (MSMEs)

Wilful Defaulters and its Consequences on the Borrowal Co. and the Banks

Lenders in tight spot over Winsome's default; banks want to shame company's director’s

MUMBAI: In the summer of 2013, Winsome Group, an almost forgotten name now, had rattled the Indian bullion and diamond markets after it defaulted with 14 banks. Low-profile and less flashy than Vijay Mallya, two Winsome Group companies left a hole of Rs 6,800 crore in the books of local lenders — making the diamond house the country's second-largest wilful defaulter after Kingfisher Airlines.

Now with the Central Bureau of Investigation snapping at banks' heels, desperate lenders are threatening to name and shame some of the former and present independent directors of Winsome Diamonds & Jewellery and another group company, Forever, to salvage their money.

In a rare and harsh move, Punjab National Bank, with exposure of Rs 1,800 crore — the highest in the consortium — has shot off letters to three persons asking them to help in arranging repayment, failing which the bank would declare them 'wilful defaulters' and even publish their names and photographs in newspapers. They are Harimohan Namdev, a practising company secretary; Madan Khurjekar, a former banker; and Urvashi Saxena, who was a senior official with the income-tax department. Among them, Namdev is still on the board of Winsome.
All of them said that in their replies to the PNB chairman as well as to the manager of the bank's Cuffe Parade branch in Mumbai, it has been pointed out that as per Reserve Bank of India rules independent directors cannot be declared 'wilful defaulters' for a company's failure to repay loans.

With PSBs such as SBI and PNB having a harrowing time recovering Rs 9,000-crore dues from Kingfisher Airlines and its promoter Vijay Mallya, the term 'wilful defaulter' has become the darling of prime time news. Last year, the government had said wilful defaulters owe Rs 64,300 crore to state-owned banks.

Mechanism for Wilful Defaulter as per RBI is as follows:

Quote “Mechanism for identification of Wilful Defaulters:

The mechanism referred to in paragraph 2.5 above should generally include the following:

(a) The evidence of wilful default on the part of the borrowing company and its promoter / whole-time director at the relevant time should be examined by a Committee headed by an Executive Director or equivalent and consisting of two other senior officers of the rank of GM / DGM.

(b) If the Committee concludes that an event of wilful default has occurred, it shall issue a Show Cause Notice to the concerned borrower and the promoter / whole-time director and call for their submissions and after considering their submissions issue an order recording the fact of wilful default and the reasons for the same. An opportunity should be given to the borrower and the promoter / whole-time director for a personal hearing if the Committee feels such an opportunity is necessary.

(c) The Order of the Committee should be reviewed by another Committee headed by the Chairman / Chairman & Managing Director or the Managing Director & Chief Executive Officer / CEOs and consisting, in addition, to two independent directors / non-executive directors of the bank and the Order shall become final only after it is confirmed by the said Review Committee. However, if the Identification Committee does not pass an Order declaring a borrower as a wilful defaulter, then the Review Committee need not be set up to review such decisions.

(d) As regard a non-promoter / non-whole time director, it should be kept in mind that Section 2(60) of the Companies Act, 2013 defines an officer who is in default to mean only the following categories of directors:

(i) whole-time director

(ii) where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;

(iii) every director, in respect of a contravention of any of the provisions of Companies Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings and who has not objected to the same, or where such contravention had taken place with his consent or connivance.

Therefore, except in very rare cases, a non-whole time director should not be considered as a wilful defaulter unless it is conclusively established that:

I. he was aware of the fact of wilful default by the borrower by virtue of any proceedings recorded in the minutes of meeting of the Board or a Committee of the Board and has not recorded his objection to the same in the Minutes; or,

II. the wilful default had taken place with his consent or connivance.

The above exception will however not apply to a promoter director even if not a whole time director.

(iv) As a one-time measure, Banks / FIs, while reporting details of wilful defaulters to the Credit Information Companies may thus remove the names of non-whole time directors (nominee directors / independent directors) in respect of whom they already do not have information about their complicity in the default / wilful default of the borrowing company. However, the names of promoter directors, even if not whole time directors, on the board of the wilful defaulting companies cannot be removed from the existing list of wilful defaulters.

(e) A similar process as detailed in sub-paragraphs (a) to (c) above should be followed when identifying a non-promoter / non-whole time director as a wilful defaulter.” UNQUOTE

1. Who is a wilful defaulter?

A company can be classified as wilful defaulter when it fails to repay loans even when it has the capacity to honour it, or when it diverts funds for purposes other than for which the loan was disbursed, or when assets which were used as guarantees are sold off without the prior knowledge of the bank.

2. How are they identified?

The Reserve Bank of India (RBI) advocates a two-committee screening process for identifying a wilful defaulter. The first committee would examine if the borrower can be classified as a wilful defaulter. If so, a show cause notice is issued to the borrower. After giving a hearing the borrower, the committee would justify their reasons. The second com mittee, headed by an MD or a chairperson of the bank, would look into the first committee's findings and issue the final order.

The RBI rule says that only the whole time directors and directors who had been party to the diversion of funds can be held liable for the default.

3. What is the main purpose of identifying a wilful defaulter?

The aim is to disseminate credit information regarding a wilful defaulter, so that he is unable to secure credit from any other financial institution or bank. Further once identified, a wilful defaulter's name along with all his address details and photograph is usually published in newspapers and websites so that they can be publicly shamed.

4. How does it affect the borrower's business?

If an individual is termed 'wilful defaulter', not only his company's assets are frozen but his access to funding gets restricted. Further if that person is present on the board of any other company , that company also gets prohibited from getting loans from banks or raising funds through equities.

5. What actions can a bank take in case of a wilful default?

In case of diversion of funds with malafide intentions, banks can initiate criminal proceedings against the wilful defaulter. Banks can also take other legal actions such as selling of their assets secured to them.

6. What banks can do to prevent?

Banks should monitor the end use of the funds and initiate prompt action in case of misuse of funds. Further, banks are required to inform Equifax, Experian, CRIF High Mark and CIBIL about all cases identified as wilful defaulters. They need to disseminate the information on their websites. It should also submit the quarterly list of wilful defaulters where suits have not been filed to the RBI.

Source : ET, RBI - RBI Master Circular on Wilful Defaulters: https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=9907

Read more at:
http://economictimes.indiatimes.com/articleshow/51418001.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst & http://economictimes.indiatimes.com/markets/stocks/news/et-in-the-classroom-damages-of-a-wilful-defaulter-stamp/articleshow/51404477.cms      .