Tuesday, March 24, 2009
US plans to buy toxic assets of $1 trillion
US plans to buy toxic assets of $1 trillion
The Economic Times, March 24, 2009, Page 10
Reuters WASHINGTON
THE United States offered on Monday financing for private investors to help cleanse banks of up to $1 trillion in toxic assets that are blocking lending and worsening a deep US recession.
Markets rallied on the news, in contrast to a disappointed reaction last month to the bare outline of treasury secretary Timothy Geithner’s proposed public-private partnerships. Questions remained about how the toxic assets would be priced and the stakes are high for Mr Geithner as he seeks to convince investors he has a viable plan to get credit flowing again.
“If the US authorities actually succeed in buying up to $1 trillion of ‘toxic assets’, it would be considered a significant step,” said Mamoru Yamazaki, chief economist with RBS Securities in Tokyo.
“However, the markets will be disappointed if the programmes do not move forward due to problems regarding how the asset value is measured.”
Initially, Treasury will pitch in with $75 billion to $100 billion to launch the partnerships, taking the money from the $700 billion financial rescue fund Congress approved in October, a Barack Obama administration official said.
The government money would be put alongside private capital and then leveraged up to $500 billion, or possibly double that amount, with the help of the Federal Deposit Insurance Corp, a US bank regulator, and the Federal Reserve.
Mr Geithner, writing in Monday’s Wall Street Journal, said it was necessary to do something to clean up the banking sector and restore lending.
“Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience,” he said, referring to a decade of economic stagnation in Japan in the 1990s.
Under the program Mr Geithner has crafted, the government will provide the lion’s share of the funding to buy up soured assets to encourage private investors to participate.
Mr Geithner was due to brief on the plan later on Monday. Many investors are concerned at the anger that has been levelled at Wall Street by lawmakers who are seeking to claw back bonuses from companies rescued with public funds.
“Investors will be very wary of committing capital at the same time as Congress is vilifying Wall Street on bonuses,” Sean Callow, currency strategist at Westpac in Sydney. “If markets have bought the rumour then the risk is they sell the fact of the Geithner plan,” he said.
Reaction in global markets was more upbeat. Asian stocks rose to a two-month high on Monday and European shares jumped in early trade. Currencies rallied against the dollar with the Aussie dollar and sterling, whipped by market turmoil at the height of the crisis, climbing almost 2% and 1%, respectively.
BlackRock, one of the world’s largest asset managers, said it was keen to be involved in the plan. “It is definitely our intention to get involved as one of the investment managers in this program,” Curtis Arledge, managing director and co-head of US fixed income at the company said.
One part of the plan would see Treasury provide from 50% to 80% of the equity capital needed to set up a fund, and the FDIC would lend the partnership up to six times the amount of its combined capital.
Another part aimed at taking mortgagerelated securities off bank books would let up to five investment managers put up money, with the government matching it dollar-fordollar and then providing debt equal to half the combined fund.
“The real challenge would be in pricing these toxic assets,” said Linus Yip, strategist, First Shanghai Securities, Hong Kong. “If the government and banks can reach an agreement on that, then there is a pretty good chance the credit market will return to normal.”
By having the managers compete, an Obama administration official said a market could be created for securities that do not currently trade.
To help clear old mortgage debt off bank books, the Federal Reserve would broaden the financing it provides under its new Term Asset-Backed Securities Loan Facility, or TALF. The TALF, now a $200 billion programme, will be bumped up to $1 trillion and will begin accepting older residential mortgage-backed securities that were once rated Triple-A, as well as commercial mortgage-backed securities and asset backed securities that are Triple-A, as collateral for loans.
The Economic Times, March 24, 2009, Page 10
Reuters WASHINGTON
THE United States offered on Monday financing for private investors to help cleanse banks of up to $1 trillion in toxic assets that are blocking lending and worsening a deep US recession.
Markets rallied on the news, in contrast to a disappointed reaction last month to the bare outline of treasury secretary Timothy Geithner’s proposed public-private partnerships. Questions remained about how the toxic assets would be priced and the stakes are high for Mr Geithner as he seeks to convince investors he has a viable plan to get credit flowing again.
“If the US authorities actually succeed in buying up to $1 trillion of ‘toxic assets’, it would be considered a significant step,” said Mamoru Yamazaki, chief economist with RBS Securities in Tokyo.
“However, the markets will be disappointed if the programmes do not move forward due to problems regarding how the asset value is measured.”
Initially, Treasury will pitch in with $75 billion to $100 billion to launch the partnerships, taking the money from the $700 billion financial rescue fund Congress approved in October, a Barack Obama administration official said.
The government money would be put alongside private capital and then leveraged up to $500 billion, or possibly double that amount, with the help of the Federal Deposit Insurance Corp, a US bank regulator, and the Federal Reserve.
Mr Geithner, writing in Monday’s Wall Street Journal, said it was necessary to do something to clean up the banking sector and restore lending.
“Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience,” he said, referring to a decade of economic stagnation in Japan in the 1990s.
Under the program Mr Geithner has crafted, the government will provide the lion’s share of the funding to buy up soured assets to encourage private investors to participate.
Mr Geithner was due to brief on the plan later on Monday. Many investors are concerned at the anger that has been levelled at Wall Street by lawmakers who are seeking to claw back bonuses from companies rescued with public funds.
“Investors will be very wary of committing capital at the same time as Congress is vilifying Wall Street on bonuses,” Sean Callow, currency strategist at Westpac in Sydney. “If markets have bought the rumour then the risk is they sell the fact of the Geithner plan,” he said.
Reaction in global markets was more upbeat. Asian stocks rose to a two-month high on Monday and European shares jumped in early trade. Currencies rallied against the dollar with the Aussie dollar and sterling, whipped by market turmoil at the height of the crisis, climbing almost 2% and 1%, respectively.
BlackRock, one of the world’s largest asset managers, said it was keen to be involved in the plan. “It is definitely our intention to get involved as one of the investment managers in this program,” Curtis Arledge, managing director and co-head of US fixed income at the company said.
One part of the plan would see Treasury provide from 50% to 80% of the equity capital needed to set up a fund, and the FDIC would lend the partnership up to six times the amount of its combined capital.
Another part aimed at taking mortgagerelated securities off bank books would let up to five investment managers put up money, with the government matching it dollar-fordollar and then providing debt equal to half the combined fund.
“The real challenge would be in pricing these toxic assets,” said Linus Yip, strategist, First Shanghai Securities, Hong Kong. “If the government and banks can reach an agreement on that, then there is a pretty good chance the credit market will return to normal.”
By having the managers compete, an Obama administration official said a market could be created for securities that do not currently trade.
To help clear old mortgage debt off bank books, the Federal Reserve would broaden the financing it provides under its new Term Asset-Backed Securities Loan Facility, or TALF. The TALF, now a $200 billion programme, will be bumped up to $1 trillion and will begin accepting older residential mortgage-backed securities that were once rated Triple-A, as well as commercial mortgage-backed securities and asset backed securities that are Triple-A, as collateral for loans.
SEZs may finally land tax relief on services
SEZs may finally land tax relief on services
The Economic Times, March 24, 2009, Page 9
Deepshikha Sikarwar NEW DELHI
THE government is considering a move to spare units in special economic zones (SEZ) from paying any tax on services inside the zones, rolling back an earlier decision to offer service tax refunds.
The finance ministry may soon issue a notification in this regard soon, said a government official who did not wish to be named.
Early this month, the finance ministry had replaced blanket exemption on services within special zones with a refund mechanism, while extending tax benefit to services offered outside the zone too. Under this, a company first has to pay the tax and then claim refund.
While total exemption is being restored for input services, SEZ units will still need to claim tax refunds on services offered outside the zone.
The finance ministry decision to take a relook at the policy follows strong opposition from the commerce department and exporters groups like the Export Promotion Council for EoUs and SEZs.
While refund for tax on services used outside the zone was a welcome change, extending refund mechanism to services used inside a zone drew a sharp reaction.
Exporters prefer blanket exemption as refund blocks their funds and increase paperwork and transaction costs. Refunds have to be claimed within six months from the date of payment.
Prior to the change in rules in March, developers did not have to pay tax on services used within the zone, though those used outside were taxable.
The change in service tax rules was announced following protracted discussions between the commerce and revenue departments and a decision in this regard by the empowered group of ministers on SEZs headed by finance and external affairs minister Pranab Mukherjee.
The SEZ Act provides for an exemption from service tax, which is levied at 10%, on over 100 services and exporters said they had to pay tax on services related to production within the zone but used outside the zone.
The Economic Times, March 24, 2009, Page 9
Deepshikha Sikarwar NEW DELHI
THE government is considering a move to spare units in special economic zones (SEZ) from paying any tax on services inside the zones, rolling back an earlier decision to offer service tax refunds.
The finance ministry may soon issue a notification in this regard soon, said a government official who did not wish to be named.
Early this month, the finance ministry had replaced blanket exemption on services within special zones with a refund mechanism, while extending tax benefit to services offered outside the zone too. Under this, a company first has to pay the tax and then claim refund.
While total exemption is being restored for input services, SEZ units will still need to claim tax refunds on services offered outside the zone.
The finance ministry decision to take a relook at the policy follows strong opposition from the commerce department and exporters groups like the Export Promotion Council for EoUs and SEZs.
While refund for tax on services used outside the zone was a welcome change, extending refund mechanism to services used inside a zone drew a sharp reaction.
Exporters prefer blanket exemption as refund blocks their funds and increase paperwork and transaction costs. Refunds have to be claimed within six months from the date of payment.
Prior to the change in rules in March, developers did not have to pay tax on services used within the zone, though those used outside were taxable.
The change in service tax rules was announced following protracted discussions between the commerce and revenue departments and a decision in this regard by the empowered group of ministers on SEZs headed by finance and external affairs minister Pranab Mukherjee.
The SEZ Act provides for an exemption from service tax, which is levied at 10%, on over 100 services and exporters said they had to pay tax on services related to production within the zone but used outside the zone.
DLF may buy DE Shaw’s $400m stake in DAL
DLF may buy DE Shaw’s $400m stake in DAL
The Economic Times, March 24, 2009, Page 17
Our Bureau NEW DELHI
THE country’s largest realty company, DLF, is likely to buy hedge fund DE Shaw’s $400 million investment in DLF Assets (DAL). DLF declined to comment citing ‘silent period’ requirement before earnings announcement. DAL is a DLF promoter group company that purchases commercial properties from DLF.
The Rs 2,000 crore fund required for the transaction is likely to be raised by DAL itself by mortgaging the lease rental it is expecting to generate through its properties. DAL owes around Rs 5,400 crore to DLF. If DAL manages to payback a part of what it owes to DLF then the total receivable from DAL will come down, but it will not ease cashflow at DLF, analysts say.
This is because the extra cash will be used to payoff DE Shaw. DE Shaw investment in DAL, which is through mezzanine finance route for a fixed time period, is close to maturity and the investment fund is seeking redemption. DLF executives have said in the past that DAL will be able to raise Rs 2,000 crore either through private equity route or lease rental discounting in the current quarter. The company has so far not closed any equity deal and is working with banks to raise debt.
DLF’s increasing receivables from DAL has been the single-biggest concern among investors and analysts. DAL, originally planned as real estate investment trust (REIT) to be listed on Singapore stock exchange, has investments from DE Shaw ($400 million) and UK-based investment fund Symphony Capital ($650 million).
The biggest issue with raising investment in DAL is its valuation in a falling property market. The cap rate of property of the company has gone up from 9% in 2007 to 13% now. Higher cap rate means lower valuation for a property. On the existing cap rate, DAL valuation has dropped from $2.24 billion to $1.55 billion.
DAL is expected to have 9.5 million sq ft of assets by the end of this month, estimated to earn Rs 600 crore in annual rentals. There has been reports of DLF looking at acquiring DAL or converting its complete receivables from DAL into equity. But, as one real estate analyst with a Mumbai-based brokerage said: “Post Satyam, valuations of promoter owned companies has become a tricky issue, especially those involving transactions with a public listed company of the promoters themselves.”
Some analysts are of the view that conversion of debtor stake into DAL equity will make sense for DLF as well as DAL. At 13% cap rate, DLF will get 44% stake in DAL in lieu for its entire receivables. “DAL shareholders stake post the transaction will be diluted. However with DLF converting its debtor stake into equity, the transaction reduces overall repayments, thus boosting the enterprise value of DAL. Also with this transaction DAL will remain completely equity funded, and thus can conserve leverage if it wishes to execute the additional 7 million sq ft of balance contract with DLF,” said JP Morgan in its report a fortnight ago.
The Economic Times, March 24, 2009, Page 17
Our Bureau NEW DELHI
THE country’s largest realty company, DLF, is likely to buy hedge fund DE Shaw’s $400 million investment in DLF Assets (DAL). DLF declined to comment citing ‘silent period’ requirement before earnings announcement. DAL is a DLF promoter group company that purchases commercial properties from DLF.
The Rs 2,000 crore fund required for the transaction is likely to be raised by DAL itself by mortgaging the lease rental it is expecting to generate through its properties. DAL owes around Rs 5,400 crore to DLF. If DAL manages to payback a part of what it owes to DLF then the total receivable from DAL will come down, but it will not ease cashflow at DLF, analysts say.
This is because the extra cash will be used to payoff DE Shaw. DE Shaw investment in DAL, which is through mezzanine finance route for a fixed time period, is close to maturity and the investment fund is seeking redemption. DLF executives have said in the past that DAL will be able to raise Rs 2,000 crore either through private equity route or lease rental discounting in the current quarter. The company has so far not closed any equity deal and is working with banks to raise debt.
DLF’s increasing receivables from DAL has been the single-biggest concern among investors and analysts. DAL, originally planned as real estate investment trust (REIT) to be listed on Singapore stock exchange, has investments from DE Shaw ($400 million) and UK-based investment fund Symphony Capital ($650 million).
The biggest issue with raising investment in DAL is its valuation in a falling property market. The cap rate of property of the company has gone up from 9% in 2007 to 13% now. Higher cap rate means lower valuation for a property. On the existing cap rate, DAL valuation has dropped from $2.24 billion to $1.55 billion.
DAL is expected to have 9.5 million sq ft of assets by the end of this month, estimated to earn Rs 600 crore in annual rentals. There has been reports of DLF looking at acquiring DAL or converting its complete receivables from DAL into equity. But, as one real estate analyst with a Mumbai-based brokerage said: “Post Satyam, valuations of promoter owned companies has become a tricky issue, especially those involving transactions with a public listed company of the promoters themselves.”
Some analysts are of the view that conversion of debtor stake into DAL equity will make sense for DLF as well as DAL. At 13% cap rate, DLF will get 44% stake in DAL in lieu for its entire receivables. “DAL shareholders stake post the transaction will be diluted. However with DLF converting its debtor stake into equity, the transaction reduces overall repayments, thus boosting the enterprise value of DAL. Also with this transaction DAL will remain completely equity funded, and thus can conserve leverage if it wishes to execute the additional 7 million sq ft of balance contract with DLF,” said JP Morgan in its report a fortnight ago.
DLF down on DAL acquisition talk
DLF down on DAL acquisition talk
The Hindu Business Line, March 24, 2009, page 10
Analyst says this could mean DAL has no money to pay dues to realtor.
Our Bureau
New Delhi, March 23 The shares of real estate major DLF Ltd fell 2.16 per cent on Monday on reports that the company could be eying a stake in DLF Assets Ltd (DAL).
DLF shares on the BSE ended at Rs 167.40 against the previous close of Rs 171.10.
The CFO of DLF Group, Mr Ramesh Sanka, refused comment citing the silent period ahead of closing of the fourth quarter. Mr Sanka had last week termed similar reports as “rumours”.
A Mumbai-based analyst said that if these reports turned out to be true, it implies that DAL, which owes DLF over Rs 5,000 crore, does not have the liquidity to pay back the Delhi-based realtor.
Cash crunch doubt
“It means that they could not lease the property acquired from DLF. That, in turn, indicates that the sales made in the past (by DLF) are unsold and remains as an inventory which now needs to be reversed,” Mr Sailesh Kanani, Research Analyst-Infra & Realty, Angel Broking, said.
Market watchers said speculation that DLF is mulling such a move, in order to provide an exit route to DE Shaw (an investor in the company), had been doing the rounds over the last few days and some institutions had already “gone short” on the information.
For the third quarter ended December 2008, the sales by DLF to DAL – a company promoted by DLF Chairman Mr K.P. Singh – stood at Rs 655 crore; while the PBT contribution at Rs 258 crore represented 35 per cent of DLF’s gross profit.
The Delhi-headquartered developer has in the past sold a large portion of its commercial assets to DAL.
Earlier this year, the company had said that DAL will go for a private placement to raise up to Rs 2,500 crore (via convertible preference shares) by end-March; and had also stated that it may go for a listing later this year.
The Hindu Business Line, March 24, 2009, page 10
Analyst says this could mean DAL has no money to pay dues to realtor.
Our Bureau
New Delhi, March 23 The shares of real estate major DLF Ltd fell 2.16 per cent on Monday on reports that the company could be eying a stake in DLF Assets Ltd (DAL).
DLF shares on the BSE ended at Rs 167.40 against the previous close of Rs 171.10.
The CFO of DLF Group, Mr Ramesh Sanka, refused comment citing the silent period ahead of closing of the fourth quarter. Mr Sanka had last week termed similar reports as “rumours”.
A Mumbai-based analyst said that if these reports turned out to be true, it implies that DAL, which owes DLF over Rs 5,000 crore, does not have the liquidity to pay back the Delhi-based realtor.
Cash crunch doubt
“It means that they could not lease the property acquired from DLF. That, in turn, indicates that the sales made in the past (by DLF) are unsold and remains as an inventory which now needs to be reversed,” Mr Sailesh Kanani, Research Analyst-Infra & Realty, Angel Broking, said.
Market watchers said speculation that DLF is mulling such a move, in order to provide an exit route to DE Shaw (an investor in the company), had been doing the rounds over the last few days and some institutions had already “gone short” on the information.
For the third quarter ended December 2008, the sales by DLF to DAL – a company promoted by DLF Chairman Mr K.P. Singh – stood at Rs 655 crore; while the PBT contribution at Rs 258 crore represented 35 per cent of DLF’s gross profit.
The Delhi-headquartered developer has in the past sold a large portion of its commercial assets to DAL.
Earlier this year, the company had said that DAL will go for a private placement to raise up to Rs 2,500 crore (via convertible preference shares) by end-March; and had also stated that it may go for a listing later this year.
The three Ns of Made for India
The three Ns of Made for India
The Financial Express, March 24, 2009, Page 6
Rama Bijapurkar
Sasta, Sundar, Tikau, the mantra for success in the Indian market, has just got a new benchmark, and a new poster child: The Nano. Nirma took the Indian market by storm, as did Nokia, and as, we hope, will Nano. What they all have in common is that (1) they are market creators unfettered by analyses of what the current market size is and what it is forecasted to grow to, (2) they recognise that current product markets are the size they are not because Indians are too unevolved to have desires, but because they don’t have enough money and (3) they start with a potential customer base (and not a current industry size), they define a price and a quality that customers will accept, and then challenge themselves to deliver it profitably. It is here that many companies, especially MNCs fail badly. They set a challenge price above which they must not go, but they refuse to accept the value processing algorithm that customers have inside their heads, and what features the new age customer will or will not sacrifice, for a lower price tag.
Market creators: I remember once making a presentation to Mr. SM Datta of Hindustan Lever, who called a halt after slide 4 and said “don’t tell me what is, and why it is so; I already know it. Please re-do this presentation and tell me what can be and how we can make it so”. That’s what these market creators do—Nirma saw the potential of a large base of laundry soap users unhappy with what it was doing to their clothes, Nokia saw a large base of people struggling to get to a public phone that works, Nano sees a large base of people who dream of owning a “gaadi and bungalaa”, and want their daughters to marry men who have them.
Market creators think of doing what no one else thinks, about that which everybody sees. It is known to all of us that everyone wants to own a car, travel in comfort, signal status. The worse public transport gets, the more it is stuck in a time warp compared to everything around improving, the more the desperation for personal transport. And everyone will prefer a car to a two-wheeler.
Money vs desire: The Indian consumer is ready and willing to buy anything that makes life better, provided it is affordable and acceptable. That is the simple fact of the matter. There is no one in India who is “not ready” for a cell phone or a car or an air conditioner. There is no further evolution, education or sophistication needed for consumers to discover the desire for these modern appliances. When pundits say “at per capita income of x, consumption in India will take off”, they assume that no supplier will actually drop price thresholds dramatically. If price thresholds were discontinuously lower, then the potential buyer base and hence the actual sales would discontinuously increase. If price thresholds drop and if average incomes rise at the same time, then the potential consumer base increases even more sharply. That was the Nirma effect (and today even Wheel, the result of Hindustan Lever’s learning from Nirma is a Rs 2,000 crore brand, perhaps amongst the biggest in the world) . That is the Nokia effect, where already one in four and very soon one in three Indians have a cell phone. Hopefully that will be the Nano effect.
Of course in the entire affordability equation we also needs to take the running costs into account, be it electricity for air conditioners or petrol for cars; however the Indian consumer always has some jugaad solution to manage this. There is a very large overlap between two wheeler ownership and car ownership, with the consumer saying he uses the four-wheeler to take his family for special outings or to show off at a family wedding, but uses the two-wheeler for everyday commuting. And prepaid cards and ‘missed calls’ are what makes cell phones affordable other than the steep drop in tariff and handset prices.
Challenge of price & performance: This is the hardest thing of all to do. Stripping quality, doing “no frills” features, in order to offer a low price is suicidal. Most MNCs have learnt that. India has ‘monster consumers’. The Indian consumer, in the late 80s, may have accepted a 65% soda ash detergent powder, and stirred the detergent mixture with a stick to protect her hands. But even in the 90s, the Indian consumer did not want a moped. Young people said that they would rather defer the purchase of their own two-wheeler and struggle with public transport than settle for something so un-motorcycle like. Even a second hand motorcycle was more acceptable.
Today’s consumer is best explained through a scene from the Tamil movie Dashavataaram. In a James Bond-style fight scene, in a small village in Tamil Nadu, the hero throws a walkie-talkie out of the window and it lands in the lap of an elderly, half-demented, grandmother living in the confines of a temple. She looks at it bemused and says “What is this? A swollen cell phone?” Even she knows that a cell phone is supposed to be small, sleek and have a colour screen.
Getting this price-performance (and features) equation right is indeed the feat of innovation genius that is the Nano. It is a new age car for the new age Indian consumer who has modest income but monstrous expectations, and it does not say “let them eat cake”, and it does not say “let them know their aukaat.” It says we will deliver value for you and wealth for ourselves through “Made for India”, “Made in India” innovation.
—The author is a market strategy consultant and author of ‘We are like that only — Understanding the Logic of Consumer India’
The Financial Express, March 24, 2009, Page 6
Rama Bijapurkar
Sasta, Sundar, Tikau, the mantra for success in the Indian market, has just got a new benchmark, and a new poster child: The Nano. Nirma took the Indian market by storm, as did Nokia, and as, we hope, will Nano. What they all have in common is that (1) they are market creators unfettered by analyses of what the current market size is and what it is forecasted to grow to, (2) they recognise that current product markets are the size they are not because Indians are too unevolved to have desires, but because they don’t have enough money and (3) they start with a potential customer base (and not a current industry size), they define a price and a quality that customers will accept, and then challenge themselves to deliver it profitably. It is here that many companies, especially MNCs fail badly. They set a challenge price above which they must not go, but they refuse to accept the value processing algorithm that customers have inside their heads, and what features the new age customer will or will not sacrifice, for a lower price tag.
Market creators: I remember once making a presentation to Mr. SM Datta of Hindustan Lever, who called a halt after slide 4 and said “don’t tell me what is, and why it is so; I already know it. Please re-do this presentation and tell me what can be and how we can make it so”. That’s what these market creators do—Nirma saw the potential of a large base of laundry soap users unhappy with what it was doing to their clothes, Nokia saw a large base of people struggling to get to a public phone that works, Nano sees a large base of people who dream of owning a “gaadi and bungalaa”, and want their daughters to marry men who have them.
Market creators think of doing what no one else thinks, about that which everybody sees. It is known to all of us that everyone wants to own a car, travel in comfort, signal status. The worse public transport gets, the more it is stuck in a time warp compared to everything around improving, the more the desperation for personal transport. And everyone will prefer a car to a two-wheeler.
Money vs desire: The Indian consumer is ready and willing to buy anything that makes life better, provided it is affordable and acceptable. That is the simple fact of the matter. There is no one in India who is “not ready” for a cell phone or a car or an air conditioner. There is no further evolution, education or sophistication needed for consumers to discover the desire for these modern appliances. When pundits say “at per capita income of x, consumption in India will take off”, they assume that no supplier will actually drop price thresholds dramatically. If price thresholds were discontinuously lower, then the potential buyer base and hence the actual sales would discontinuously increase. If price thresholds drop and if average incomes rise at the same time, then the potential consumer base increases even more sharply. That was the Nirma effect (and today even Wheel, the result of Hindustan Lever’s learning from Nirma is a Rs 2,000 crore brand, perhaps amongst the biggest in the world) . That is the Nokia effect, where already one in four and very soon one in three Indians have a cell phone. Hopefully that will be the Nano effect.
Of course in the entire affordability equation we also needs to take the running costs into account, be it electricity for air conditioners or petrol for cars; however the Indian consumer always has some jugaad solution to manage this. There is a very large overlap between two wheeler ownership and car ownership, with the consumer saying he uses the four-wheeler to take his family for special outings or to show off at a family wedding, but uses the two-wheeler for everyday commuting. And prepaid cards and ‘missed calls’ are what makes cell phones affordable other than the steep drop in tariff and handset prices.
Challenge of price & performance: This is the hardest thing of all to do. Stripping quality, doing “no frills” features, in order to offer a low price is suicidal. Most MNCs have learnt that. India has ‘monster consumers’. The Indian consumer, in the late 80s, may have accepted a 65% soda ash detergent powder, and stirred the detergent mixture with a stick to protect her hands. But even in the 90s, the Indian consumer did not want a moped. Young people said that they would rather defer the purchase of their own two-wheeler and struggle with public transport than settle for something so un-motorcycle like. Even a second hand motorcycle was more acceptable.
Today’s consumer is best explained through a scene from the Tamil movie Dashavataaram. In a James Bond-style fight scene, in a small village in Tamil Nadu, the hero throws a walkie-talkie out of the window and it lands in the lap of an elderly, half-demented, grandmother living in the confines of a temple. She looks at it bemused and says “What is this? A swollen cell phone?” Even she knows that a cell phone is supposed to be small, sleek and have a colour screen.
Getting this price-performance (and features) equation right is indeed the feat of innovation genius that is the Nano. It is a new age car for the new age Indian consumer who has modest income but monstrous expectations, and it does not say “let them eat cake”, and it does not say “let them know their aukaat.” It says we will deliver value for you and wealth for ourselves through “Made for India”, “Made in India” innovation.
—The author is a market strategy consultant and author of ‘We are like that only — Understanding the Logic of Consumer India’
'Loan demand has improved in Q4'
'Loan demand has improved in Q4'
Business Standard, March 24, 2009, Section II, Page 2
Q&A: S Sridhar, Chairman & MD, Central Bank of India
Abhijit Lele / Mumbai
It has been just three weeks since S Sridhar took over the as the Chairman and Managing Director of Central Bank of India. Having worked with Exim Bank and National Housing Bank earlier, Sridhar is relatively new to commercial banking. He spoke to Abhijit Lele about the issues that he is dealing with in his new role. Excerpts:
What is your assessment about the challenges that the bank faces?
Making the bank a customer-focused organisation tops the agenda. While the bank has long-standing relationships, building further upon them is equally important for business growth. An improvement in staff competency and a thrust on contemporary work practices will also receive prime attention. The average business productivity per employee was Rs 5.49 crore at the end of December 2008, up from Rs 3.82 crore a year ago. Besides soft issues, technology upgradation – including qualitative use of the core banking platform – is necessary. The enhanced staff competency and technology initiatives will give the bank a modern look and feel.
The government has recently allocated Rs 700 crore to the bank and will put in another Rs 700 crore during 2009-10. How is this going to help you?
It will improve the capital adequacy ratio, provide more headroom for lending and expand the balance sheet. Another benefit will be an improvement in credit rating. The total capital adequacy at end of the third quarter was 10.02 per cent. The infusion has strengthened tier-I capital (it had slipped below 6 per cent – the floor set by the Reserve Bank of India). The coupon on the tier-I instruments that the government will subscribe to is expected to be firmed up this week.
Your bank has reduced interest rates on home and auto loans over the last month or so. What has been the response?
There are some signs of growth in demand. We had lowered interest rates on home loans of up to Rs 5 lakh to 8 per cent. This is a very small business segment. Now, this benefit has been extended to loans in the Rs 5-20 lakh category too, and we are witnessing an increase in response.
How has your performance been during the current quarter, which is usually the busy season? What will be the year-on-year credit and deposit growth?
For the bank, there is a definite improvement in credit demand during the present quarter as compared with the third quarter (October-December 2008). I will comment on the specific numbers for the fourth quarter after the close of the financial year. The year-on-year growth in gross advances was 38.3 per cent till the end of the last quarter, with gross advances at Rs 81,467 crore at the end of December 2008.
The yield on government bonds has hardened this month. How is this going to impact the valuation of your government securities portfolio?
The impact will not be very positive. Let us see how the yields move during the remaining days of March.
The economic downturn has raised concerns of a rise in default risks. How will the bank deal with the issue?
The bank is alive to such risks and my effort is to be proactive. We are already restructuring viable accounts, which are facing temporary cash flow problems. The gross non-performing assets (NPAs) had declined sharply from 4.37 per cent in December 2007 to 2.81 per cent in December 2008. The emphasis will be on preventing accounts from slipping into the NPA category. We will be careful in selection at the entry stage. Plus, a systematic study of industry trends should help us in picking up signals.
Business Standard, March 24, 2009, Section II, Page 2
Q&A: S Sridhar, Chairman & MD, Central Bank of India
Abhijit Lele / Mumbai
It has been just three weeks since S Sridhar took over the as the Chairman and Managing Director of Central Bank of India. Having worked with Exim Bank and National Housing Bank earlier, Sridhar is relatively new to commercial banking. He spoke to Abhijit Lele about the issues that he is dealing with in his new role. Excerpts:
What is your assessment about the challenges that the bank faces?
Making the bank a customer-focused organisation tops the agenda. While the bank has long-standing relationships, building further upon them is equally important for business growth. An improvement in staff competency and a thrust on contemporary work practices will also receive prime attention. The average business productivity per employee was Rs 5.49 crore at the end of December 2008, up from Rs 3.82 crore a year ago. Besides soft issues, technology upgradation – including qualitative use of the core banking platform – is necessary. The enhanced staff competency and technology initiatives will give the bank a modern look and feel.
The government has recently allocated Rs 700 crore to the bank and will put in another Rs 700 crore during 2009-10. How is this going to help you?
It will improve the capital adequacy ratio, provide more headroom for lending and expand the balance sheet. Another benefit will be an improvement in credit rating. The total capital adequacy at end of the third quarter was 10.02 per cent. The infusion has strengthened tier-I capital (it had slipped below 6 per cent – the floor set by the Reserve Bank of India). The coupon on the tier-I instruments that the government will subscribe to is expected to be firmed up this week.
Your bank has reduced interest rates on home and auto loans over the last month or so. What has been the response?
There are some signs of growth in demand. We had lowered interest rates on home loans of up to Rs 5 lakh to 8 per cent. This is a very small business segment. Now, this benefit has been extended to loans in the Rs 5-20 lakh category too, and we are witnessing an increase in response.
How has your performance been during the current quarter, which is usually the busy season? What will be the year-on-year credit and deposit growth?
For the bank, there is a definite improvement in credit demand during the present quarter as compared with the third quarter (October-December 2008). I will comment on the specific numbers for the fourth quarter after the close of the financial year. The year-on-year growth in gross advances was 38.3 per cent till the end of the last quarter, with gross advances at Rs 81,467 crore at the end of December 2008.
The yield on government bonds has hardened this month. How is this going to impact the valuation of your government securities portfolio?
The impact will not be very positive. Let us see how the yields move during the remaining days of March.
The economic downturn has raised concerns of a rise in default risks. How will the bank deal with the issue?
The bank is alive to such risks and my effort is to be proactive. We are already restructuring viable accounts, which are facing temporary cash flow problems. The gross non-performing assets (NPAs) had declined sharply from 4.37 per cent in December 2007 to 2.81 per cent in December 2008. The emphasis will be on preventing accounts from slipping into the NPA category. We will be careful in selection at the entry stage. Plus, a systematic study of industry trends should help us in picking up signals.
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