Real Estate Intelligence Report, Tuesday, April 14, 2009

PM: fiscal & monetary measures have helped India weather the storm better

PM: fiscal & monetary measures have helped India weather the storm better
The Financial Express, April 14, 2009, Page 1

Economy Bureau, Mumbai

Prime Minister Manmohan Singh on Monday admitted that the slowdown is a matter of concern, but asserted that India has weathered the storm much better than most. He noted that this was possible both due to monetary and fiscal policies to stimulate the economy.

Speaking in Mumbai on Monday, Singh also took a dig at the BJP-led NDA, saying when it was in power, GDP growth was around 5.8%, whereas during the Congress-led UPA government it had touched 9%. Despite the global economic meltdown, growth in 2008-09 would be a little less than 7%.

“Last year, our growth was interrupted by a truly exceptional global downturn. We, too, have been affected. But we have weathered the storm much better than most. Our situation is very different from the deep recession being experienced elsewhere,” he noted. The PM was speaking at an exclusive gathering that included captains of industry, organised by the Mumbai Pradesh Congress Committee.

In a similar vein, former RBI governor and current advisor to the PM C Rangarajan voiced similar optimism at the 43 rd convocation of the Indian Institute of Foreign Trade in New Delhi. “We will (see) signs of recovery in the second half of 2009. Fiscal 2010-11 will see an improvement in growth,” he said. Noting that the initiatives by RBI to ease liquidity have not percolated down to ground level, Rangarajan said it was necessary for the central bank to watch the liquidity situation and take steps from time to time.

On the issue of tackling black money, the Prime Minister said the UPA government had taken a slew of steps to unearth unaccounted money in overseas accounts held by Indian nationals. “There have been some instances recently where these things came to our notice with regard to Germany, with regard to Switzerland. I think contact is being established with the relevant authorities to provide necessary information.”

He further said there would be flow of information between the tax authorities and the banking sector once the G-20 Summit decisions to regulate tax havens are implemented. Singh also dismissed claims by BJP prime ministerial candidate LK Advani regarding estimates of black money by describing them as a figment of imagination. The BJP in its election manifesto said unaccounted money in overseas banks amount to Rs 25-75 lakh crore--large enough to allocate Rs 4 crore for development of each village in the country.

On Tech Mahindra winning the bid for fraud-hit Satyam Computer, Singh expressed reluctance to comment as the concerned board was authorised to take the necessary decisions. However, replying to another question, the PM said the country’s regulatory structure is strong enough to prevent a Satyam-like fraud in future. “Even when companies across the globe had (gone) bust due to the meltdown, Indian companies were in recognition and they continue to receive orders,” he noted.

Expect tax hike, divestment: Parekh

Expect tax hike, divestment: Parekh
The Financial Express, April 14, 2009, Page 1

fe Bureau, New Delhi

HDFC chairman Deepak Parekh has said the next administration in New Delhi would have to raise tax rates, disinvest in at least one blue-chip public sector organisation and look to consolidate the large number of state-owned banks into larger entities.

In an exclusive interview with FE, Parekh said these steps would be essential for the government to plug the large fiscal deficit of 5.5% of GDP, according to a projection in the interim Budget for 2009-10. He said these steps would create the necessary fiscal space for the government to spend on growth. “I think it is a danger signal if the growth signals are low. A larger fiscal deficit is (however) acceptable with high growth,” said Parekh.

According to him, the Indian economy was poised to recover soon and so a growth rate of 6% was quite achievable in this fiscal. The IMF in its World Economic Outlook update in January said the Indian economy could grow at as low as 5.1% this year. Parekh said a rise in tax rates—whether direct or indirect taxes—to generate revenue was something that “just could not be helped”.

“Then there has to be disinvestment of public sector undertakings. Take LIC, for instance. If the government sells 24% stake in LIC, it will get enough money to last a year and will not have to do anything more. But all said, government will have to raise taxes, and privatise and consolidate the large number of small public sector banks—these are some of the low-hanging fruits,” Parekh said.

Parekh has for quite some time been the government’s troubleshooter on several sensitive financial issues, including the current mess at Satyam. He has also chaired the government committee to develop infrastructure finance in the country.

Parekh said the list of must-dos for the new government should include speeding up the pace of executing infrastructure projects. “I think we have enough programmes, but their implementation is tardy. The performance of NHAI in the last two three years has not been good. “

SBI extends cheap loan offer till Sept

SBI extends cheap loan offer till Sept
Business Standard, April 14, 2009, Page 2, Section II

State Bank of India, the country’s largest lender, has decided to extend the special offer for auto and home loans till September.

Under the scheme, which was earlier valid till the end of April, the bank had frozen the interest rate on new home loans at 8 per cent during the first year, while the cost of auto loans was fixed at 10 per cent during the first year. Subsequently, the interest rate was to be revised to the prevailing rate.

Extending the scheme by five months, the bank also said today that top-up loans for home loan customers that are disbursed up to September 2009, would cost 8 per cent in the first year.

SBI reiterated that the special rates were aimed at stimulating demand. When it had first announced the special rate schemes, its rivals – including HDFC, the largest mortgage player – had termed the move as a teaser offer and had said that it would only result in borrowers shifting their accounts.

Subsequently, HDFC executives said that the move has not resulted in too many customers shifting to SBI to avail of the special offer. But the housing finance company responded by reducing its prime lending rate to enable its existing borrowers to avail of the lower interest rate regime.

While SBI has lowered its benchmark prime lending rate by 150 basis points since November, it has not participated in the latest round of rate cuts by public sector banks. Instead, it has come up with special loan schemes aimed at housing, auto and small and medium enterprises.

When contacted, Nanda Kumaran, SBI’s chief general manager for retail banking said the bank has sanctioned loans worth Rs 2,500 crore to over 20,000 customers under the special home loan scheme which was announced in February 2009.

Similarly, in case of the special auto loan scheme, he said, the response was good. Most auto loans disbursed through the scheme have been availed of by individuals purchasing entry-level models from Maruti, Hyundai and Tata Motors. These loans do not include the bookings for Nano, which opened last week.

“We have received a good response to the schemes and the extension by five months is expected to help boost the demand in the economy,” Nanda Kumaran added.

Executives at private sector banks said that SBI was among the most aggressive players in the car finance business at present and was among the highest loan disbursing lenders along with HDFC Bank. Many of the bigger players, such as ICICI Bank, Citi and Standard Chartered, have reduced the scale of operations in the auto loan market due to rising delinquency levels.

An SBI executive said that the country’s largest bank had managed to increase the outstanding retail credit portfolio to above Rs 1,00,000 crore at the end of March 2009, partly aided by the special offers and aggressive pricing of retail loans. It is targeting a 30 per cent growth in its retail portfolio during the current financial year.

Rupee rises to seven-week high on foreign inflows

Rupee rises to seven-week high on foreign inflows
Business Standard, April 14, 2009, Page 3, Section II

BS Reporter / Mumbai

The rupee appreciated to a seven-week high against the US dollar on flow of funds from foreign institutional investors (FIIs) and exporters.

After touching 49.8225, its highest since February 25, the Indian currency closed at 49.89 against the greenback as against Thursday’s close of 50.04, according to Bloomberg data. The market was closed on Friday.

Dealers said that the rupee gained in strength because of the money that FIIs have invested during the current stock market rally on speculation that government stimulus packages will break a global recession that drove funds from emerging markets. So far in April, foreign funds have invested $416 million in the Indian equity markets.

The Bombay Stock Exchange Sensitive Index, or Sensex, and the National Stock Exchange S&P CNX Nifty ended Monday’s session up 1.51 per cent and 1.21 per cent respectively. Since the end of February, the Sensex alone has seen a rise of 23 per cent.

Dealers also attributed the rise in the rupee’s value to some of the trade proceeds that exporters have brought into India to avoid a further drop in gains. Basically, they effected sales which also helped the rupee to gain.

Currency per dollar

Feb 25, 09Apr 13, 09% chg
Japanese yen97.39100.31-3.00
Pakistani rupee79.9180.66-0.93
Hong Kong dollar7.757.750.06
Indian rupee49.9549.890.12
Thai baht35.7735.630.39
Singapore dollar1.531.520.85
Malaysian ringgit3.673.631.04
Taiwan dollar34.7433.693.02
Indonesian rupiah11935111206.83

Korean won1516132912.31

Source : Bloomberg

There were also bunched-up inflows accumulated over the past three days in the market, said a dealer with a foreign bank. Banks also sold the dollar after noting that major currencies were rising against the greenback.

“The dollar’s weakness globally pulled the dollar/rupee NDF (non-deliverable forward) rates down, which also added to dollar sales in the market,” said a dealer with a private bank. The one-month NDF rate fell to Rs 50.05, compared with Rs 50.15 on Thursday.

Some banks also covered their short-dollar positions, which limited the rupee’s rise. Volume in the market was thin ahead of a holiday on Tuesday on account of Ambedkar Jayanti. Even a small quantity could move the trend, dealers said. Forward dollar/rupee premiums ended slightly up On Monday, after slipping earlier in the session, as importers bought forward dollars, they added.

“Some importers bought forward dollars as the rupee gained. But the volume in forwards was thin,” said a dealer with a UK bank. However, a sharp rise in forward premiums was limited as exporters sold forward dollars, dealers said. The benchmark one year forward premium ended at 2.19 per cent.

The rupee futures market also saw a similar trend towards appreciation. A total of 341,118 contracts were traded on the NSE platform for currency futures with volumes of Rs 1,704.28 crore.

Offshore contracts indicate traders bet the rupee will trade at 50 to the dollar in a month, compared with expectations for a rate of 50.24 on April 9.

Forwards are agreements in which assets are bought and sold at current prices for future delivery. Non-deliverable contracts are settled in dollars rather than the local currency.

Yen falls against Asian currencies

The yen fell against all of its major counterparts on speculation governments’ efforts to end the global recession will encourage investors to buy higher-yielding assets funded by Japan’s currency.

The yen declined 0.8 per cent to 133.20 per euro at 9:34 a.m. in New York, from 132.18 on April 10. Japan’s currency traded at 100.30 versus the greenback, compared with 100.24.

The euro increased 0.7 per cent to $1.3280 from $1.3189 on April 10, when it reached $1.3090, the lowest since March 18. The Australian dollar rose to a six-month high versus the yen and New Zealand’s currency gained versus the greenback on speculation China is considering additional measures to boost domestic consumption, bolstering the outlook for Asia-Pacific growth.

Thailand’s baht fell to its weakest level this month as anti-government protesters fought police.

“There’s a window here for a pickup in risk appetite,” said Shaun Osborne, chief currency strategist in Toronto at TD Securities, a unit of Canada’s second-largest bank. “We are more bearish on the yen than anything else.”

The Aussie dollar gained 0.9 per cent to 72.64 US cents, while New Zealand’s currency increased 0.5 per cent to 58.67 on speculation China’s economic-stimulus measures will spur growth throughout the Asia-Pacific region.

China’s government will issue some “guideline” policies and continue to use fiscal and taxation measures to spur an expansion, the official China Securities Journal reported On Monday, citing Gao Huiqing, a researcher at the State Information Center, as saying on April 11.

Banks park over Rs 1 lakh cr via reverse repo

Banks park over Rs 1 lakh cr via reverse repo
Business Standard, April 14, 2009, Page 3, Section II

BS Reporter / Mumbai

For the fourth consecutive day, banks parked over Rs 1,00,000 crore with the Reserve Bank of India (RBI) through the reverse repo window, indicating that there was a surplus liquidity in the system.

As a result, the weighted average call rate was 3.52 per cent, as against 3.55 per cent on Saturday, according to data on the Clearing Corporation of India’s website. Rates ranged between 2 per cent and 3.65 per cent On Monday though markets are closed tomorrow.

Additionally, this is the start of the new reporting fortnight and, typically, demand for funds is strong during the first week of the reporting fortnight as banks cover most of their requirements to meet the prescribed level of reserves.

A large liquidity overhang was visible in the Collateralised Borrowing and Lending Operations (CBLO) segment too with rates moving in the 1.25 per cent to 5 per cent range.

ONE WAY TRAFFIC

Amount parked with RBI via reverse repo

Amount (Rs cr)
April 61,21,910
April 81,32,465
April 91,30,840
April 131,03,295

Though rates came under pressure towards the end of the trading session, the weighted average rate was 1.62 per cent, as against 3.42 per cent on Saturday.

While a part of the reason for the surplus liquidity is the limited demand for loans at the start of the financial year, money has also flowed into the system with bonds maturing.

The high level of liquidity in the system is making bankers believe that the Reserve Bank of India may not reduce the cash reserve ratio in the forthcoming annual policy, which is due on April 21.

Cash reserve ratio is the proportion of deposits that banks have to set aside. Since the credit crisis intensified last year, RBI has lowered the CRR by 400 basis points to 5 per cent.

A high level of liquidity is also being seen as a pre-cursor for banks to lower deposit rates. Bank of Baroda On Monday announced a reduction in deposit rates by 50 basis points.

‘I think the worst is over’

‘I think the worst is over’
The Financial Express, April 14, 2009, Page 7

In any given week, HDFC chairman Deepak Parekh is usually in the middle of at least one government of India commission to clear up some aspect of India’s financial sector, whether it’s infrastructure finance, setting up organisations like IDFC, asking for innovative financing support for IIFCL or clearing up the mess at Satyam. Just a day before the Satyam bids were to be opened, he found time to meet up with Subhomoy Bhattacharjee of FE to discuss subjects ranging from the new government’s priorities to growth prospects:

Could we start with what is now tentatively coming up in all financial commentaries. Are growth prospects becoming brighter in the Indian economy?

I think the worst is over. January to March has been the best quarter; lots of companies are saying so. Cement companies have said so. Some of the FMCG company chairmen—I can not name them—have said this, that the first quarter of 2009 has been the best in our history. So I see a visible improvement. Auto sales have picked up—housing demand is there. Overall demand conditions are much stronger. Some sectors have been impacted of course, like commodities, and the quarterly results now due will show these trends. But you know, Indians are accustomed to cribbing—oh, the world is coming to an end and so on. I do also.

What about the banks:

My personal view is that Indian banks are very safe. Reasonably well-capitalised, well-managed. Adequate capital adequacies. You know government has allowed public sector and private sector listed banks to raise tier II capital: a combination of subordinate debt, senior debt and junior debt. So Indian banks have got adequate amount of tier II capital. Yes, non-performing loans will increase. But they will not increase unmanageably; this will be within limits. I see the gross NPAs for the entire banking sector as being about 2.2%. That will rise to probably 3% next year. But this is not alarming in the Indian scenario. India has one of the highest cash reserve ratios and statutory liquidity ratios in the world. The latter is government paper. In a scenario of declining interest rates, banks will make a huge amount of money on their gains from the mark to market on these government securities. With those profits, the banks will make adequate provisioning. That’s what we have done in the past and that’s what banks will do now. Considering the large redemption of money by the regulators and the increase in government debt in this fiscal, I don’t think, therefore, that the 3% NPAs are alarming or something to be concerned about. These include credit card loans also.

However, internationally, we hear and we fear that credit cards insurance companies and even now many European institutions are still vulnerable. US companies have declared their losses. But in India it will not be a financial crisis. There can be lots of other crises—but not financial. For that the credit goes to strict regulators. All of us, including me, were critical of the restrictions put up.

Including those on real estate:

They prevented us from giving loans for land three years ago. Banks were not allowed to lend for buying land. That’s what has helped the banks. A land bubble was being created. Therefore in the last three years the entire land purchase money has come from other sources: initial public offers, the AIM market in the UK, preferential allotment to qualified institutional buyers and private equity. Huge amounts of money has come to real estate from PE.

A lot of preferential allotment to QIBs came in the garb of cumulative convertible preference shares, which is basically debt in the garb of equity to get automatic approval. They are the ones who lost money. But now that land prices have collapsed, it is no longer an asset in today’ s terms. The demand for high-end properties is just not there. The demand for IT buildings, SEZs, malls etc has gone down. Only the demand for affordable housing is there. In Mumbai or Delhi, if you build flats at a cost of Rs 25-35 lakh, there is a demand. That range would be Rs 20 lakhs in other cities.

But builders are being dragged kicking and screaming to the altar of low-priced flats.

The margins are much lower on smaller flats. They are screaming because compared to the debts the realisations are low on these. The other thing is that many of the builders have to also get back their reputation, by completing their projects. This is possible. For instance, I have seen in Mumbai and Pune some developers assuring buyers that, say, if we sell a flat at a price lower than what we sold you for, we will correspondingly reduce your price. That is how future sales will happen. But only with those developers who have the vision and the capability to stick to such price points in their projects. The demand is there; the need for housing is enormous in India.

Moving over from housing to the broader theme of infrastructure, real estate and others are complaining that the rates of interest are still very high.

What developers do not realise is that all finance institutions give the best rates to retail borrowers. We always cross-subsidise. The margins we earn on retail loans are much smaller. But we still give to individuals at lower rates, as there is competition. So you compensate that by charging higher from the developers. That is why developers complain they don’t get low rates. But what I am concerned about is that they are at the same time borrowing from NBFCs or the unorganised markets, even moneylenders, at much higher rates. I worry about that. I don’t think we are overcharging, therefore.

So there is an issue on interest rates?

There is some cause to reduce deposit rates for bank deposits. Only if the cost of funds comes down can the lending rates move. In India we always say we must give a 7% rate of interest on deposits, otherwise there is no social security. We have a mental attitude not to reduce the rates below that. In the US or Japan the rates are far lower but if the rates are brought down further, will the public or the government of the day accept that? Deposit rates must be reduced aggressively. But if there is a cap or a floor then you can’t reduce that. Banks have very little window to make profits by lending out at decent rates, because of the same issues of cross-subsidisation of loans to the priority sector and so on.

Last week, the Indian industry has made a case for interest subvention by the government for housing and automobiles. Is that fair or even viable?

We have never done that in India. On the question of whether it is fair, is what the US or the UK are doing by nationalising banks fair? But then the question is whether the Indian government will do this.

A new government will come in another month. Whoever comes in, the chances are they will turn to Mr Parekh for ideas. What would you suggest are the low-hanging fruits to be plucked?

I think we have too many low-hanging fruits. Unfortunately, we have too many priorities and everything is a question of catching up. Everything is making up for lost time. I can think of ten things that are low-hanging ones.

Let me say that I think we have enough programmes but their implementation is tardy. The performance of NHAI in the last two-three years has not been good. I am sorry to say that it is far from satisfactory. It had started with a bang. It has huge sums of money but we can’t see the same pace of massive construction being undertaken through those funds. The board of NHAI consists only of government secretaries. Why can’t we have representatives from industry, say auto or tyre manufacturers, or citizens who use cars, as independent directors? They will push the pace of investment in NHAI. Once that happens, a lot of other things follow. That is how prosperity happens, that is how GDP is added to, that’s how employment is created; but we are not doing that.

The other areas where we need to move fast are in construction techniques. The global recession is the best window to spend on infrastructure. We can scour the world for the best of capital equipment that would now be available at throwaway prices. Interest rates are not very high overseas at this juncture, so we can borrow in foreign currency. The new government must therefore look at high levels of investment in infrastructure. Instead of waiting for the time when the rest of the world also starts picking up interest once this phase is past.

We could also use our forex very usefully for this purpose. But this has not gone down well. My suggestion was not very appreciated. IIFCL, for instance, has been given only $5 billion from the reserves, that too very reluctantly.

But on pace of execution, as I have said, it is our responsibility to get the work going 24 hours a day. In the power sector, for instance, the pace of progress is very limited on ultra mega power projects. It has been about one and half years since the approval for only the first of those, the Tata Mundra project, was given.

What is your take on the need for a fiscal responsibility bill?

Fiscal deficit is a major issue. Here, I think it is a danger signal if the growth signals are low. A larger fiscal deficit is acceptable with high growth. For the next year (2009-10), IMF is projecting an Indian GDP growth rate of 4%; that is very negative. I am sure we can do 6%.

But to contain the deficit within limits, the new government will have to do several things at once. They have to increase taxes. It just cannot be helped. Then, there has to be disinvestment of PSUs. Not small ones but large ones. Take LIC for instance. If the government sells 24% stake in LIC, they will get enough money to last a year and they will not have to do any thing more. Or some of the government stake in ONGC. But all said, they will have to raise taxes and privatise and consolidate the larger number of small public sector banks—these are some of the low-hanging fruits.

Is there any possibility of the merger of HDFC and HDFC bank. There was a recent report...

I have not met any analyst from Macquarie for this report, so obviously they have done their own research. They are speculating. Guess estimate, I would say. My point is that here are two organisations. Both have the same name, both have done well today and have been doing so for the last ten years. Both have shown consistent growth in top and bottom lines. They have generally clocked a good growth rate of 20% all the time, on a huge base. Again both have NPAs that are below 1%. We both don’t have surplus staff or surplus real estate. So what is the justification at the moment when both are strong, stable and doing well independently.

There can be room for picking up stake in other organisations. Like HDFC Bank’s acquisition of Centurion Bank of Punjab. That is growth. HDFC too could buy a housing finance company. We did that when we bought Home Trust from Ambuja Cements.

The other worry is the impact of such a merger on our balance sheets. We will have to provide huge provisions for SLR and CRR. For that, we need to borrow and put that money in government securities, which means taking a beating in terms of returns.

Therefore, unless there is some need like say the growth in the housing market collapses, or the bank runs up a need for huge capital when the credit markets turn bad. So unless that sort of need arises, I don’t see the necessity.

There are advantages though. One, we can have a much larger balance sheet; our net worth becomes huge. We can be among the top five in market caps. Economies of scale are important. What India needs at this juncture is a small number of large banks, not a large number of small banks.

A stronger bank can provide funding for an ultra mega power project that often needs a Rs 15,000 crore loan. Tell me how many banks the developers have to go to now. Our industry is growing much faster than the banks, and banks must follow industry. That, in turn, requires large deposit bases. Many small banks are too tiny and should not carry on that way.