Real Estate Intelligence Report, Tuesday, July 14, 2009

Banks see rates rising 100 bps in second half

Banks see rates rising 100 bps in second half
Business Standard, July 14, 2009, Page 1

BS Reporter / Kolkata

A day after Union Finance Minister Pranab Mukherjee said the government’s huge borrowing programme would not push up interest rates, bankers remain unconvinced.

Government-owned State Bank of India, the country's largest lender, sees interest rates rising by up to 100 basis points in six months if cash conditions tighten. It has company in UCO Bank, which foresees a rise of as much as 150 basis points in its prime lending rate (PLR), IDBI Bank, and others.

Banks are flush with cash but anticipate pressure after the government last week announced record borrowings of Rs 4.51 lakh crore for the current financial year, about Rs 89,000 crore more than what was forecast in February’s Interim Budget. The Reserve Bank of India and the finance ministry are scheduled to meet in New Delhi on Friday to draw up a calendar and the modalities for this borrowing.

“Last fiscal, RBI was prudent in debt management and this year also we will ensure that the private sector can get loan at affordable rates and not pay higher interest,” Mukherjee said on Sunday.

Last month, SBI reduced its benchmark PLR by 50 basis points to 11.75 per cent. Commercial bank lending rates have fallen 200 basis points since last October, after the central bank slashed its main lending rate by 425 basis points to revive a slowing economy. Bank loan growth slowed to 15 per cent in June from 30 per cent in 2007-08, but is expected to pick up in the coming months as economic activity revives.

“There is a possibility of interest rates going up by 25 to 100 basis points if liquidity is not managed well when the busy season picks up," SBI Chairman O P Bhatt said on the sidelines of a banking conclave in Kolkata. “Inflation is going up, government borrowing will increase and liquidity in the system will come down.”

He does not see much scope for reduction in rates, as the bank’s net interest margin has come down from 3.16 per cent in December 2008 to 2.32 per cent. “We would like to maintain 2.50-3.00 per cent by the end of this financial year,” he said.

Echoing Bhatt, UCO Bank Chairman & Managing Director S K Goel said if government borrowing and higher credit demand squeezed liquidity, interest rates could rise to 14 per cent in the third quarter. The bank’s current PLR is 12.5 per cent.

Goel’s counterpart in IDBI Bank, Yogesh Agarwal, said recently that interest rates had softened in the past few months, but that would change. “The situation is now going to turn. When corporate demand picks up in the third quarter, one should be ready for higher interest rates.”

Allahabad Bank CMD K R Kamath said he expected RBI to ensure ample liquidity and the government borrowing to happen in a non-disruptive manner. “If these two do not happen, interest rates might go up,” he said.

United Bank of India CMD S C Gupta said, if liquidity was not managed prudently, interest rates might go up in the fourth quarter when credit demand was expected to pick up.

Bank of India Chief Financial Officer V K R Agarwal agreed. “With deficient rainfall, the risk of rise in the consumer price index is real. When CPI (consumer price index) moves up (due to energy and food prices), consumers (depositors) may expect banks to protect their returns on deposits. In such circumstances, banks may have to increase deposit rates.”

RBI was prudent in debt management last fiscal, too. This year also, we will ensure that the private sector gets loan at affordable rates and does not pay higher interest rate Pranab Mukherjee Finance Minister

There is a possibility of interest rates going up by 25 to 100 basis points if liquidity is not managed well when the busy season picks up O P Bhatt SBI Chairman

If govt borrowing and higher credit demand squeezes liquidity, interest rates could rise to 14% (current PLR 12.5%) in the third quarter S K Goel CMD, UCO Bank

The situation is now going to turn. When corporate demand picks up in the third quarter, one should be ready for higher interest rates Yogesh Agarwal,CMD, IDBI Bank

Rates could rise after Diwali, says SBI chief

Rates could rise after Diwali, says SBI chief
The Financial Express, July 14, 2009, Page

fe Bureau, Kolkata

State Bank of India chairman OP Bhatt on Monday hinted at the possibility of interest rates rising after October if liquidity in the system is not managed well.

“If there is huge amount of credit growth, which will happen with economic growth picking up, interest rates will go up. If liquidity is not managed well, interest rates may go up by 25 to 100 basis points. Maybe that will happen after Diwali,” Bhatt said.

Bhatt made the comments at a banking conclave organised by the Federation of Indian Chambers of Commerce & Industry, in the city.

The comments by the chairman of India’s largest bank is significant, made a day after finance minister Pranab Mukherjee assured private investors that large government borrowing will not stifle fund availability for the private sector.

“Borrowers will not have to pay a higher interest rate for their loan and the private sector will not be crowded out by the government borrowing,” he said. Industry and banking circles have been concerned about the finance ministry’s plans to borrow Rs 3,97,957 crore in fiscal 2009-10 to meet government expenditure. The ministry has projected a 52% rise in net market borrowing over the Rs 2,61,972 crore it raised in 2008-09, as tax receipts are expected to decline by 2% year-on-year.

In a tight credit market, when the government borrows more, there is less space left for the private sector to raise funds. The bond market, which had cooled after Mukherjee’s statement, is expected to flare up again. When government borrows more, the prices of its paper dip because of over-supply and the yields rise. Mukherjee’s comments had pacified the markets on Monday, with the yields on the benchmark 10-year paper declining to 6.79% from 6.90 % on Friday.

Mukherjee also said the government is working in close cooperation with the central bank. “There is no inherent contradiction that we are pursuing or following with RBI in reference to the annual monetary and fiscal policies. We are working in close cooperation. We have done it during the worst period of the present crisis,” he said.

Bhatt said SBI has seen a marginal rise in its credit of about Rs 5,000 crore quarter-on-quarter for the April-June period this fiscal. The bank’s liquidity level, he said, is comfortable level and the “NIM (net interest margin) will not get hit.”

SBI, meanwhile, is looking at measures to improve its compliance with the Community Reinvestment Act after the Federal Deposit Insurance Corporation (FDIC) of Chicago has rapped the bank.

FDIC has urged the bank to improve the performance of its Chicago unit to meet local credit needs more. On the question of a possible acquisition in Indonesia and African countries, Bhatt said the bank is not looking at any such acquisition at present.

Interest rates may rise by 100 bps: SBI

Interest rates may rise by 100 bps: SBI
The Economic Times, July 14, 2009, Page 11

Our Bureau KOLKATA

STATE Bank of India (SBI) chairman OP Bhatt on Monday said in no uncertain terms that interest rates had bottomed out and they might start rising after six months. Interestingly, his statement comes days after finance minister Pranab Mukherjee’s assurance that ample funds will be available for corporates even after the government borrows over Rs 4 lakh crore from the market.

Nevertheless, bankers and market players across the spectrum expect the proposed government borrowing to suck out liquidity from the system, something that is likely to push up interest rates. At present, the interbank system has funds of over Rs 1 lakh crore.

“Interest rates may rise 25-50 basis points (bps) or even by 100 bps after three to six months. The extent of the rise will hinge on the management of liquidity available in the system. If liquidity isn’t managed well and demand for bank funds goes up, it is logical that interest rates will harden from current levels,” Mr Bhatt said in Kolkata, at a banking conclave organised by Ficci’s Eastern Regional Council.

He also expressed concern over SBI’s falling net interest margin (NIM). SBI’s NIM is now at 2.32% for the quarter to June 2009, compared with 3.16% for the December 2008 quarter. Mr Bhatt conceded the margin had shrunk below the comfort level, which he pegged at a minimum 2.5%.

“SBI’s interest rates in different loan products are the lowest in the market. We can’t reduce rates further,” he told the gathered businessmen categorically.

“It’s the public sector banks that facilitate economic growth. Despite working with a narrow margin, we continue to spend for improving banking penetration and social sector. If you allow banks to bleed, you will ultimately hurt your own economy and business,” Mr Bhatt said.

Coming back to the economy, government’s net borrowing is pegged at a whopping Rs 3.98 lakh crore in 2009-10 to fund the ballooning fiscal deficit projected at 6.8% of the country’s gross domestic product.

On being asked about SBI’s new ventures, Mr Bhatt said the bank is planning to enter custodian services as two-way joint venture (JV) between itself and French financial major Societe Generale. The foreign partner would take a 35% stake in the JV, which is expected to kick off operation by this fiscal.

FIIs have pulled out $1 billion since Budget

FIIs have pulled out $1 billion since Budget
The Times of India, July 14, 2009, Page 19

TNN, MUMBAI

Foreign institutional investors (FIIs) have withdrawn over $1 billion from the stock market alone since the Budget was presented on July 6. To some extent, this huge selling has pulled each of BSE sensex and NSE nifty down by 10% during the same period. Although during the same period, domestic institutions — that include insurance companies, mutual funds and banks — have net bought stocks worth nearly $900 million, but this buying has failed to cushion the selling foreign funds, market players said.

Data released by BSE and NSE showed that between July 6 and July 13, FIIs have net sold stocks worth Rs 5,241 crore, or nearly $1.1 billion at current exchange rate, while domestic institutional institutions (DIIs) have net bought stocks worth Rs 4,406 crore.

This data, however, differs from the FII numbers released by Sebi which shows a net inflow during the same period. The difference is because the Sebi data also includes stocks bought by FIIs through the QIP and public offers, buybacks and also investments in unlisted companies, experts tracking FII/DII investments said.

So in six trading sessions, on an average FIIs withdrew about $180 million from the market each day. As a result, institutional dealers pointed out the rupee has depreciated against the dollar: From 47.89 on July 3, the last trading day before budget, the Indian currency is down at 49.08 now.

Although it is mainly the FII selling that has pulled the markets down since Budget, the FII index has fallen less than the sensex and the nifty. Compared to the 10.1% fall in these benchmarks, Instanex FII index has lost 9.7%.

“Although there have been strong selling by FIIs, the relative outperformance of the FII index signals that the market could soon bounce back,'' said Gautam Chand, chief executive, Instanex Capital. The company manages the sole FII index available in the Indian market.

Soon after the Budget, institutional dealers had said that FIIs with long-term investment mandate were awaiting further signals from the government on its economic policies.

Finmin seeks to drop Jan 31 cut-off for IIFCL refinance

Finmin seeks to drop Jan 31 cut-off for IIFCL refinance
The Financial Express, July 14, 2009, Page

Sunny Verma, Surabhi, New Delhi

While Budget 2009-10 projected that infrastructure investment of up to Rs 1 lakh crore would be made available by banks and India Infrastructure Finance Company Ltd (IIFCL), there aren’t enough takers for the Rs 10,000 crore offered last fiscal.

Since the sum is meant to finance only projects bid on or after January 31, 2009, the finance ministry has proposed that the cut-off date be removed. This would allow IIFCL to refinance infrastructure projects bid in 2008 as well.

The issue is expected to feature in IIFCL’s board meeting scheduled for Tuesday, which would also work out the contours of the ‘takeout financing’ scheme unveiled by the finance minister Pranab Mukherjee. Finance secretary Ashok Chawla, who is on the IIFCL board, will also attend the meeting. When contacted, IIFCL chairman SS Kohli confirmed the meeting, but did not elaborate.

The government's first stimulus package in December 2008 authorised IIFCL to raise Rs 10,000 crore through tax-free bonds to refinance projects bid on or after January 31 in the road and port sectors. But IIFCL has been unable to disburse most of the funds as projects take a long time to bid out. For instance, although bids have been invited for nearly 40 highway projects, they are expected to be awarded only in August.

“While new projects would be looking for funds possibly from September, there are a number of ongoing projects that need money. So, we have asked IIFCL to open the refinance facility for them as well,” a government official said.

“The (January 31) deadline was an issue, and it would be a good move if it is removed.

Existing infrastructure projects will get a boost as IIFCL's interest rates are more competitive,” said PricewaterhouseCoopers executive director Hemal Zolabia.

Under the refinance scheme, IIFCL can refinance up to 60% of loans provided by banks to infrastructure projects in the roads and port sectors at 7.85%. Banks can then charge a spread of up to 250 basis points above this. The refinance tenor is ten years with a reset after five years, though that can be extended to 15 years with government approval. The takeout financing scheme, which is also a form of refinance, will draw upon the structure of the existing scheme.

These efforts are seen as crucial to encourage lending to long-gestation infrastructure projects, for example, in the power sector where 18-20 years is seen as a viable duration for funding. The finance ministry feels at least a third of IIFCL’s total financing pool should be in the form of takeout financing.

The scheme is being formalised to ensure that banks can sell their loan portfolio to a third party after a certain period of time. This will free up banks’ capital and absolve them from long-term obligations.

Central Bank of India executive director Arun Kaul said, “In the road sector, repayment is over at least 15 years. I, as a banker, do not have funds for 15-year duration. But if I get an exit route after five years, I will be willing to finance a 15-year loan. In this case, IIFCL will provide the exit route.”

A leading private developer said, “There was a lull in the road sector, and there were no developers looking for funding for about six months. The last projects were bid out even before September 2008. Now, as recently as this month, two or three projects have been awarded, which will start approaching the financial markets in another few months. But at a time when projects have to be aggressively pushed, the government should ensure that all systems are in place to carry them forward.”

Infrastructure sector growth tumbled to 2.8% in May 2009, compared with 5% in April, even though industrial production rebounded smartly to grow 2.7% in May 2009 from 1.2% in April.

Hospitality sector to revive not before mid-2010

Hospitality sector to revive not before mid-2010
The Financial Express, July 14, 2009, Page 12

Sulekha Nair, Shweta Bhanot, Mumbai

The hospitality industry is expected to limp back to normalcy not before the second quarter of 2010. Much depends upon the biggest inbound season starting October, thus keeping the profitability of the industry under pressure, say experts.

The industry has seen an overall fall of 25%-30% in revenue per available room (RevPar). RevPar is an important metric relevant to the hotel industry. Often it is utilised as a primary statistic indicating the overall financial performance of a property. Food & beverage (f&b) business including banquet and conferences are also performing under pressure. “Though f&b is showing signs of recovery on the back of strong domestic demand, banqueting and conferences are still way behind from recovery,” said a Delhi-based hotelier. Banqueting and conferences are around 10%-15% down compared to last year.

HVS International-India managing director Manav Thadani said, “The industry has been able to withstand the bad six to seven months of late 2008 on the back of the strong early months in the year. However, the real picture of the industry will be known only next year (once it has gone through the biggest inbound season starting October this year).”

All the major cities in the country are currently operating at around 15% lower occupancy rates compared to last year. The average room rates (ARRs) have slipped down by 15-20% across the major cities in the country.

Pointing that one needs to keep in mind that comparison is being done to peak attained by the industry, Rohit Khosla, general manager, Taj Lands End, Mumbai, claims that despite the slowdown, the industry is still profitable.

“The margins are normal, though not exorbitant as they were, say a year ago,” he said. “This is the time to consolidate and re-position ourselves,” he said talking on the sidelines of the 15th regional convention of Hotel & Restaurant Association (H&RA) Western India last week. The hotels in Mumbai have seen a fall of around 15%-20% drop in room rates in the last couple of months.

Zuri Group of Hotels director Preeti Chand said, “A positive trend in ARRs has been seen since mid-June. From July onwards, the ARRs are looking up and we hope to cover up better than last year.” She added that the company expects this financial year to end positive on both the f&b and banqueting segments.

Corroborating the same, Keshav Baljee, vice-president, corporate affairs, Royal Orchid Hotels Ltd, said, “We expect business to go back to usual by October.” He added that the recovery in the industry has started with f&b and overall businesses showing signs of improvement.

Tamil Nadu puts work on IT parks, SEZs in tier-II cities on fast track

Tamil Nadu puts work on IT parks, SEZs in tier-II cities on fast track
The Financial Express, July 14, 2009, Page 12

fe Bureau, Chennai

Tamil Nadu, which clocked a 29% jump in its IT software exports in 2008-’09 is now increasingly looking at tier-II cities to add glamour to its export basket. As part of its renewed thrust on IT, the government is spreading its wings to tier-II cities with a plan to penetrate all regions in the state by establishing IT parks and SEZs. The Tamil Nadu government has put on fast-track, development works at the proposed IT parks and SEZs coming up at major tier-II cities in the state, minister of information technology Poongothai told the state Assembly on Monday.

The Tamil Nadu government, which has been actively promoting IT in the state through Electronics Corporation of Tamil Nadu (ELCOT), has identified 9 tier-II cities like Coimbatore, Madurai, Tiruchirappalli, Salem, Tirunelveli, Hosur, Vellore, Sholinganallur and Perumbakkam for setting up IT parks/IT-ITeS SEZs. The IT park in Coimbatore is expected to go on stream by December 2009.

According to a policy note on IT, the Coimbatore IT park will be developed by ELCOT, in association with TIDCO, TIDEL Park, Chennai and Software Technology Parks of India (STPI), which will have a size of 17.11 lakh sq-ft. IT major Wipro has been allotted land to establish its premises at the park.

Two SEZ IT parks have been planned in Madurai district, one at Ilandhaikulam village and the other at Vadapalanji-Kannimangalam village. At Ilandhaikulam, land has been allotted to HCL, Honeywell International and Tessolve Services, while HCL, Sutherland Global Services and Mahindra Satyam have been allotted land at the Vadapalanji-Kannimangalam park. Basic infrastructural facilities required for these two parks are now being developed by ELCOT.

At Sholinganalur and Perumbakkam villages, setting up an integrated IT township, for which the Centre has given SEZ status, has been proposed. According to plans, the township, spreading over 199 acres of land, will boast of 10 million sq-ft of IT built-up space, besides basic social infrastructural facilities like housing, medical facility, school, commercial and entertainment facilities.

At Tiruchirappalli, an IT-ITeS has been planned in 147.61 acre and IT firm Sutherland has been allotted land at the park, for which, ELCOT is in the process of readying the basic infrastructure facilities. The proposed IT park at Salem , coming up in 164.26 acre of land, is under construction, while the Tirunelveli IT-ITeS SEZ, coming up in 500 acre of land, has been getting good responses from IT companies. The proposed IT parks at Hosur and Vellore are in different stages of development, said the policy note.

The Tamil Nadu IT department is also in the process of implementing common service centres, which will be involved in the delivery services of all citizen-centric departments. The roll-out of these common services will take place soon. As part of the new initiative in the IT domain, the government will launch new schemes for skill building for e-governance programmes in 2009-2010 and also reposition investment strategy in the new world economic environment, according to the policy note.