Real Estate Intelligence Service, Tuesday, August 11, 2009

GDP forecasts head south as monsoon falls short

GDP forecasts head south as monsoon falls short
HT Business, August 11, 2009, Page 1

Two respectable agencies, credit rater CRISIL and the Centre for Monitoring Indian Economy (CMIE) signalled on Monday that a shortfall in monsoon rains seemed set to hit agricultural output, in turn affecting GDP growth, industrial demand and inflation.

CRISIL said production of rice, pulses and coarse cereals are most affected. “Six states that account for 47 per cent of the total kharif foodgrain production and 46 per cent of the total kharif rice production in India have been affected by the poor rainfall,” said Dharmakirti Joshi, principal economist CRISIL, referring to Uttar Pradesh, Madhya Pradesh, Maharashtra, Andhra Pradesh, Bihar and West Bengal.

“We now expect the GDP to grow by 5.8 per cent in 2009-10 compared to 6.6 per cent expected earlier,” CMIE said in a report. Investment bank Goldman Sachs has also predicted GDP growth at 5.8 per cent on the back of a weak monsoon.

“The lower rainfall projections will likely lead to negative agricultural growth. We retain our FY10 GDP growth forecast of 5.8 per cent, and think that consensus forecasts of 6.3 per cent, and the Prime Minister’s Economic Advisory Council’s forecast of 7 per cent look a bit rich,” said Tushar Poddar, chief economist, Goldman Sachs India.

“Rural demand will be negatively impacted, and this is a significant negative shock for the equity market,…” said Poddar.

“While the overall national agriculture is not at risk as was in 2002, some states definitely face a grave situation. This will definitely shave off some part of the GDP. Food inflation, which is already pressurised will face further pressure due to poor rainfall,” CRISIL said in a monsoon update.

CMIE said production of sugar and edible oils will fall by 3.6 per cent and 2.5 per cent, respectively, adding industrial production will now grow by 4.8 per cent during 2009-10 compared to 5.1 per cent estimated earlier.

Rains may be weakest in seven years: IMD

Rains may be weakest in seven years: IMD
Business Standard, August 11, 2009, Page 1

Kaustubh Kulkarni / Pune/mumbai/new Delhi

After being in denial mode, the India Meteorological Department (IMD) today pared its forecast for a second time in three months and said state governments were free to announce “drought”. This came amid widespread concerns that the monsoon rains, the main source of irrigation for farmers, may, in fact, be the weakest in more than seven years.

Rain in the June-September season will be 87 per cent of the long-period average, compared with 93 per cent forecast in June, Ajit Tyagi, director general at India Meteorological Department said. Rainfall could be 4 per cent more or less than the estimate, he said.

Speaking to Business Standard, A B Mazumdar, deputy director general at IMD, Pune, said the Met department had earlier predicted normal rainfall this year “but projections do vary over a period of time".

He added, "As of now, a large number of regions have seen deficient rainfall. The state governments are free to declare drought, which do not necessarily depend on rainfall numbers.”

The Bihar government today declared 26 out of 38 districts in the state as "natural calamity-hit" following deficient rainfall, and asked Prime Minister Manmohan Singh to sanction a special package to tackle the crisis.

Between June 1 and August 6, Bihar received just 331.7 mm of rain against the normal 568.5 mm, a 42 per cent deficiency. This has resulted in a 58 per cent decline in paddy transplantation.

Asked what went wrong with monsoon projections this year, Mazumdar said, “Such predictions were based on certain climatic situations that did not necessarily develop that way.”

He added, however, that "the rainfall numbers should recover over the remaining season, although it’s sure that we now expect less rains than normal”.

Mazumdar said parts of central India should receive good rains over the next 15 days and he expected the rainfall shortage to improve in Jharkhand, Madhya Pradesh and some regions of Andhra Pradesh.

The markets don’t seem to be that convinced. Shares of consumer goods companies and automobile makers paced declines in the Bombay Stock Exchange Sensitive stock index, which fell 150 points on concerns that deficient rainfall may cut incomes of rural India, cooling demand for their products.

Mahindra & Mahindra, the largest producer of sport-utility vehicles and tractors, dropped 9.4 per cent and Maruti Suzuki lost 5.3 per cent. Hindustan Unilever, the biggest FMCG company, slid 5.6 per cent.

Rice has been the worst hit, with the area declining by 6 million hectares. Sugar follows closely. While Uttar Pradesh, the second-largest sugar producer, has declared drought in 47 districts, Maharashtra has cut its sugar output forecast to 4.6 million tonnes from 5 million predicted in June.

Global sugar prices have jumped to their highest in more than 25 years as India, the world’s largest consumer, has had to tap the global market to offset the impact of the poor monsoon on the country’s sugarcane crop. Prices in India are, however, still lower than the cost of imported sugar.

Crisil Economist Dharmakirti Joshi said any shortage on food can push up the consumer price index much faster this time as the index is very high in comparison to previous drought situations in 2002-03. “If the monsoon revives from now on, the damage to crops may be limited. But the damage done to crops such as paddy can’t be undone now,” he said.

Tushar Poddar, vice-president and chief economist at investment bank Goldman Sachs India, said that the weak rainfall could reduce agricultural growth to -2 per cent year-on-year, down from an earlier estimate of 1.4 per cent.

And UBS has warned that if rainfalls failed to improve, real growth in GDP could be 1 to 2 per cent lower this year than its forecast of 7 per cent.

A Citigroup study said the damage on the price front had taken place. Despite the mitigating factors like the possibility of a better winter crop and higher foodstocks, primary product prices have begun to spiral. Commodities hit include pulses, rice, fruit and vegetables and cereals.

CMIE, Goldman peg GDP growth at 5.8% for FY10

CMIE, Goldman peg GDP growth at 5.8% for FY10
The Financial Express, August 11, 2009, Page 2

Press Trust of India, Mumbai

Economic think-tank Centre for Monitoring Indian Economy (CMIE) on Monday revised downward country’s economic growth projection to 5.8% for the current fiscal as against the earlier estimates of 6.6% due to a poor monsoon even as global investment banking firm Goldman Sachs revised its estimates for FY11 to 7.8% from 6.6%— based on a better investment outlook and external environment and recovery in demand. It, however, kept the growth rate for current fiscal unchanged at 5.8%.

“We are raising our FY 11 GDP growth forecast significantly to 7.8% from 6.6% due to a much improved investment outlook, especially for infrastructure, a recovery in consumption demand, and a better external environment,” Goldman Sachs said. It also attributed this to several Indian companies raising capital through qualified institutional placements (QIPs).

Goldman Sachs has pegged inflation target for end of FY 10 at 6.5%, with risks firmly to the upside “We think inflationary pressures are building up. Food prices are rising, and we think will continue to rise due to the prospect of a significantly poor summer crop. Our end-March 2010 target for WPI inflation is at 6.5%,” Goldman Sachs said

CMIE blamed failure of monsoon particularly in the month of June and July for the lower projections. According to CMIE, economic activity is expected to pick up from September as a result growth will improve to 7.1% in the March quarter of 2010 from 4.7% in the June quarter.

CMIE, Goldman peg GDP growth at 5.8% for FY10

CMIE, Goldman peg GDP growth at 5.8% for FY10
The Financial Express, August 11, 2009, Page 2

Press Trust of India, Mumbai

Economic think-tank Centre for Monitoring Indian Economy (CMIE) on Monday revised downward country’s economic growth projection to 5.8% for the current fiscal as against the earlier estimates of 6.6% due to a poor monsoon even as global investment banking firm Goldman Sachs revised its estimates for FY11 to 7.8% from 6.6%— based on a better investment outlook and external environment and recovery in demand. It, however, kept the growth rate for current fiscal unchanged at 5.8%.

“We are raising our FY 11 GDP growth forecast significantly to 7.8% from 6.6% due to a much improved investment outlook, especially for infrastructure, a recovery in consumption demand, and a better external environment,” Goldman Sachs said. It also attributed this to several Indian companies raising capital through qualified institutional placements (QIPs).

Goldman Sachs has pegged inflation target for end of FY 10 at 6.5%, with risks firmly to the upside “We think inflationary pressures are building up. Food prices are rising, and we think will continue to rise due to the prospect of a significantly poor summer crop. Our end-March 2010 target for WPI inflation is at 6.5%,” Goldman Sachs said

CMIE blamed failure of monsoon particularly in the month of June and July for the lower projections. According to CMIE, economic activity is expected to pick up from September as a result growth will improve to 7.1% in the March quarter of 2010 from 4.7% in the June quarter.

Growth rate may now come down to 6.5%: CII

Growth rate may now come down to 6.5%: CII
The Economic Times, August 11, 2009, Page 8

BUT still India’s GDP growth defied prophesies of doom to expand by a creditable 6.7%, one of the highest growth rates achieved by major economies, although lower than the 9%-plus growth seen in the preceding three years.

While predictions for GDP growth in the current year have ranged from the World Bank’s 5.1% to 7%-plus by the prime minister’s economic advisory council, the failure of the monsoon risks tilting those predictions to the lower end of the forecast band.

“We expected GDP to grow at close to 7%, but the growth rate may now come down to 6-6.5%,” said CII president Venu Srinivasan.

University of Chicago professor and former chief economist of the International Monetary Fund Raghuram Rajan said the below-average monsoon could shave as much as one percentage point off India’s GDP growth this year.

“The monsoon will have an effect, but not as devastating as it would have been in the past. Now hopefully it takes a fraction of a percentage point or a percentage point off growth, which still looks reasonably healthy,” Mr Rajan, a former advisor to Prime Minister Manmohan Singh, was quoted as saying.

There are also fears that the monsoon failure could feed inflationary expectations, and agricultural economists are apprehensive that the growth rate for the primary sector, which has grave implications not just on food security and the government’s import bill but also the health of manufacturing and other sectors, could be on a par with the severe drought year of 2002-03.

“It is a very bad situation in terms of crop output from all accounts. It could be a drought situation on a par with 2002 in terms of farm sector growth,” an economist with think-tank Icrier said.

However, Pronab Sen, the country’s chief statistician, said it was too early to predict a crop failure. “There is no real threat to economic growth this fiscal on this account. Rising food prices have more to do with speculation at this stage than a crop failure. Before every harvest, a lot of speculation activity takes place, driving up prices,” he said. Economist DK Joshi of ratings firm Crisil concurred, saying it was too early to cut GDP growth forecast. “Although there will be a fall in agriculture output, improving external environment and recovery in industrial activity may offset it. We have seen this happening during earlier droughts,” he said. These views are supported by economic data emerging from different parts of the world. The US is increasingly seen as being on the mend after it declined just 1% in the second quarter to June-end, prompting rating agency Moody’s to upgrade its second-half outlook for the economy, which accounts for about 23.5% of the world economic output.

Nobel Prize winning economist Paul Krugman, not known for his optimistic views about the US economy, also thinks the recession may have bottomed out. “It’s quite possible, though not certain, that retrospectively, we’ll say the recession ended in July or August, maybe September,” Mr Krugman was quoted as saying in Kuala Lumpur, adding the world economy may face several years of weak growth without falling into a “double-dip” recession.

Promoters’ holding in top 6 realty cos takes beating

Promoters’ holding in top 6 realty cos takes beating
The Economic Times, August 11, 2009, Page 5

QIP, Stake Sale To Blame; But No Takeover Threat Yet

Sanjeev Choudhary NEW DELHI

PROMOTERS’ equity holding in top six real estate companies fell between 4% and 31% over one year period ended June 30, 2009 on account of stake sale by them, sale of pledged shares by lenders and issue of fresh shares to institutional investors.

Promoters’ stake in country’s second-largest developer Unitech and third-largest firm Indiabulls Real Estate fell significantly to 43% and 16.73%, respectively. But analysts say these companies may not become takeover targets due to the nature of the business.

“Consolidation in Indian real estate sector is likely to happen at project level rather than at company level. A target company can offer brand, relationship and land, but it’s impossible for the acquirer to leverage the relationship as it is individual-driven. So it makes sense for them to go for acquisition of only physical assets,” according to Aashiesh Agarwaal, a real estate analyst with Edelweiss Securities.

Adds another real estate analyst with a Mumbai-based domestic brokerage, who asked not to be named: “In India, most real estate companies have close nexus with politicians, who have their black money invested in these firms. Despite such a deep downturn, no realty firm went bust. The politician-investor will never let a realty company be taken over.”

Unitech promoters saw their holding decline the most —around 31% from 74% a year ago. The promoters lost almost 10% stake in the company as lenders sold shares pledged with them following sharp drop in valuation of the firm in a falling stock market.

Promoter Ramesh Chandra’s stake declined further 21% with the issue of fresh shares in two tranches in April-June quarter to raise $900 million. The share issue was necessitated to repay huge debt that the company had piled on its balance sheet. Unitech’s debt levels had peaked at Rs 10,000 crore, which has now come down to around Rs 7,000 crore.

DLF promoter K P Singh and family also had to sell 9.9% stake in the company to raise funds to pay hedge fund DE Shaw that was looking to exit from DLF Assets (DAL), another company promoted by Mr Singh. Mr Singh raised Rs 3,800 crore through the stake sale. DE Shaw is yet to exit DAL.

Indiabulls Real Estate promoters—Sameer Gehlaut, Saurabh Mittal and Rajiv Rattan—too saw their stake fall by almost 10% to 16.73% following a QIP to raise $565 million in the June quarter. Promoters owned minority stake even before the QIP, but analysts say the company is safe because of higher FII holding, who may not welcome hostile acquirers. FIIs hold 62% stake in the company.

Similarly, country’s fourth-largest developer HDIL’s promoter Wadhawan family’s holding fell around 10% to 51% following $325 million QIP. Promoters’ stake in Bangalore-based Sobha Developers fell from 87% to 65% after the company raised $130 million through share sale to qualified institutional buyers.

Delhi-based Omaxe, which is looking to raise Rs 600-700 crore through QIP, has seen its promoter Rohtas Goel’s stake slide by over 4%, possibly on account of sale of pledged shares by the lenders.

GONE FOR A TOSS

The declining list...
Unitech promoters saw their holding decline to 31% from 74% a year ago.
DLF promoter K P Singh and family also had to sell 9.9% stake in the company
Indiabulls Real Estate promoters—Sameer Gehlaut, Saurabh Mittal and Rajiv Rattan—too saw their stake fall by almost 10% to 16.73% following a QIP HDIL’s promoter Wadhawan family’s holding fell around 10% to 51% following $325-million QIP.
Promoters’ stake in Bangalore-based Sobha Developers fell from 87% to 65% after the company raised $130 million through share sale to qualified institutional buyers.
Delhi-based Omaxe, which is looking to raise Rs 600-700 crore through QIP, has seen its promoter Rohtas Goel’s stake slide by over 4%, possibly on account of sale of pledged shares by the lenders.

60% jump in China property sales to fuel realty bubble

60% jump in China property sales to fuel realty bubble
The Financial Express, August 11, 2009, Page 18

Bloomberg

China's property sales surged 60% by value in the first seven months, adding to concern that record lending will create a real-estate bubble in the world's fastest-growing major economy. Sales accelerated after a 53% gain in the first half from a year earlier, the statistics bureau said in a statement on its website on Monday. Real estate investment rose 11.6%, up from 9.9% in the six months to June 30. Home prices in 70 major cities advanced 1% in July from a year earlier, the biggest increase in nine months, the National Development and Reform Commission said in a separate statement. Premier Wen Jiabao reiterated on Sunday that monetary policy will remain unchanged, after climbing asset prices triggered speculation that a tightening could be imminent.

“Policy makers may be getting a bit edgy about asset bubbles developing,” said David Cohen, an economist with Action Economics in Singapore. “They may use administrative measures to cool prices.” Property stocks, which have gained 142% this year to be the best performing group on the Shanghai Composite Index, fell 1.6% as of 2:12 pm local time on concern loan growth will slow. Poly Real Estate Group Co fell 2.7%. China Construction Bank Corp president Zhang Jianguo said last week that the nation's second-biggest bank will cut new lending by about 70% in the second half to check bad debts.

“There's concern that while the macro-economic policy will stay the course, the real-estate industry won't escape some policy fine-tuning,” said Zhang Chifei, a Nanjing-based real- estate analyst at Huatai Securities Co.

China's economic growth accelerated in the second quarter and the Shanghai Composite Index has climbed almost 80% this year, powered by $1.1 trillion of lending in the first six months. Home prices in the 70 cities began to rise in June after declining for the previous six months. Property sales by area climbed 37% in the first seven months from a year earlier, the statistics bureau said.

“The overall increase that we're seeing in property prices is still manageable, the government would be more concerned about the stock market,” said Sherman Chan, an economist at Moody's Economy.com in Sydney. “Higher confidence and more liquidity” are causing price gains, she added.

Central bank and finance ministry officials said on Friday that they will scrutinise gains in stock prices without capping new lending. The Financial Times reported the same day that the central bank had told the largest state-controlled lenders to slow growth in new loans, citing unidentified people familiar with the matter.

Property prices are being boosted by a lack of investment alternatives in China, Kenneth Tsang, Asia Pacific head of research at LaSalle Investment Management, said on August 6. In July, new home prices rose in 43 cities and fell in 26 from a year earlier, the NDRC said. The largest increase was a 6.4% gain in the eastern city of Ningbo. Month-on-month, 63 cities posted increases in new home prices, with three reporting declines.

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Goldman pegs China GDP at 9.4%

Goldman Sachs Group Inc raised its forecast for China's economic growth this year to 9.4%, citing “strong momentum” and the likelihood that the government will delay tightening policy. The previous estimate was for a gain of 8.3% from a year earlier, Hong Kong-based economist Michael Buchanan said in an e-mailed report on Monday. The economy may expand 11.9% next year, he said. “China is closer to a point at which it should be equally worried about tightening too late as it is about tightening too early,” the economist said. Policy makers won't move quickly because they remain “very cautious” against the backdrop of weakness in the global economy, he said.

China's GDP expanded 7.9% in the second quarter from a year earlier, rebounding from the weakest growth in almost a decade, as a 4 trillion yuan ($585 billion) stimulus package and record lending took effect.

IAS officers among 16 suspended in Rs 4,721-cr Noida land scam

IAS officers among 16 suspended in Rs 4,721-cr Noida land scam
The Financial Express, August 11, 2009, Page 3

fe Bureaus, Lucknow

The Uttar Pradesh government on Monday suspended 16 officials, including three IAS officers, for their alleged involvement in the Rs 4,721-crore land allotment scam in Noida.

The land had been allotted by the then Mulayam Singh Yadav government to hoteliers for construction of hotels for the Commonwealth Games.

The suspension was ordered by chief minister Mayawati, who also directed that FIRs be lodged against the officers and legal proceedings initiated.

All the three IAS officials are former chief executive officers who headed the area development authority during 2006-07.

They are Rakesh Bahadur, Sanjeev Saran and Ravindra K Nair, who had been posted as additional CEO during the period of the scam.

Additional Cabinet secretary Vijay Shanker Pandey told mediapersons that the scam was related to allotment of lucrative hotel plots to certain parties in violation of rules.

Stating that the scam was responsible for causing the state exchequer a whopping loss of Rs 4,721 crore, he said that all allotments were cancelled as soon as the irregularities were detected.

In an effort to attract capital investment in the tourism industry, the Uttar Pradesh tourism department had unveiled the hotel policy in 2006.

The Noida authority board identified 25 plots in sectors 96, 97 and 98 for setting up three, four and five-star hotels.

Of the 31 applications received for allotment of plots, 14 plots were allotted for various categories of hotels in January 2007.

It was planned that these hotels would provide 5,000 rooms for the 2010 Games.

However, ever since the allotment of the plots, the issue was shrouded in controversy.

Two PILs were filed in the Allahabad High Court against these allotments, in which it was brought to the notice of the high court that the land allotment rate for these plots was Rs 7,400 per sq metre against a market rate of Rs 1,69,000 per sq metre, for which no tender was invited.

Once Mayawati returned to power in 2007, she immediately scrapped the hotel policy and ordered immediate cancellation of the plots. It was against this cancellation of allotment that the 14 hotel owners filed writs in the high court, which quashed the cancellation order of the plots and directed the state government to accord personal hearing to the plaintiffs and issue rational orders within six weeks.

However, after conducting the hearings, the state government found serious irregularities in the allotments and a decision was taken on Sunday to suspend the officials involved in the scam.

Unitech launches ‘affordable housing’ project in Chennai

Unitech launches ‘affordable housing’ project in Chennai
The Hindu Business Line, August 11, 2009, Page 2

R. Balaji, Chennai

Unitech Group has launched two residential projects in Chennai including Uni Homes in the affordable segment in a southern suburb, and a Rs 4,500-crore township in North Chennai.

Uni Homes is a brand positioned in the fast-growing affordable homes category. These would be gated communities with 500-1,000 sq.ft. apartments priced in the Rs 10-30 lakh range depending on the location and the city. The company has announced plans to launch Uni Homes in Noida, Mohali, Rewari, Bhopal, Kolkata and Chennai.

According to market sources, Uni Homes is coming up at Nallambakkam on the Kelambakkam-Vandalur road about 30 km to the south of Chennai off National Highway 45. This project is linked to UniWorld City, a 250-acre township to be launched later. Uni Homes is coming up on an 11.5-acre plot with 1,000 apartments in blocks of ground plus three floors.

Each two-bedroom-hall-kitchen apartment of 700 or 715 sq.ft. costing Rs 12.91 lakh and Rs 13.19 lakh.

These are on offer at a launch price of Rs 1,845 a sq.ft which is about Rs 200 less than what it could cost when formally launched after approvals are in place shortly, said the sources. Delivery is planned for end 2011.

The company has tied up with Food Bazaar to set up a convenience store and is in discussions with a hospital chain for healthcare facilities.

BINNY MILLS TOWNSHIP

Unitech marked its entry into Chennai a couple of months back with the soft launch of a 70-acre residential township at Perambur, on where Binny Mills formerly stood located.

The project is a joint venture between the Hyderabad-based PVP Group, the land-owner, and Unitech and Arihant Foundations. Over 4,000 apartments are planned, with each priced at Rs 19 lakh. Nearly 1,000 apartments have been sold, according to Unitech.

FIIs turn net-buyers worth $6.4 billion in June quarter

FIIs turn net-buyers worth $6.4 billion in June quarter
Business Standard, August 11, 2009, Section II, Page 1

Chandan Kishore Kant / Mumbai

Take a fancy to realty, banking & finance, engineering and oil & gas.

Initial signs of recovery in world economies, a stable government in New Delhi and the positive impact of its stimulus packages substantially improved the sentiments of foreign institutional investors (FIIs) in the April-June quarter.

After being net-sellers in the last five quarters, they turned net-buyers in the equities market in the June quarter. According to data from Enam Securities, they were net-buyers of Rs 30,720 crore, or $6.4 billion ($1=Rs 48).

However, they were selective in their buying. Only four sectors — real estate, banking & finance, engineering and oil & gas.— garnered almost three-fourths of the money invested by FIIs. These four sectors accounted for over 71 per cent of the total FII investment at $ 4.55 billion during the quarter.

Realty attracted an investment of $1.6 billion, followed by banking and financial services ($1.5 billion), engineering ($875 million) and oil& gas ($580 million).

Analysts tracking the realty sector said that the outlook was improving. Rupesh Sankhe, research analyst at Centrum Broking, said: “The three main drivers that have pushed the realty sector are price discounts (20 per cent in case of new launches of affordable housing), low interest rates and the pent-up demand of last year.”

Not so long ago, the sector was being beaten down by market players because realtors were facing severe cash crunch, which had forced many of them to sell their land-banks and exit projects.

Though things have not completely changed, many of them have started focussing more and more on affordable projects to attract demand. The government, through public sector banks and sops for houses below Rs 20 lakh, is also trying to boost demand. These government moves have also contributed significantly to the improved sentiment among investors.

Realty majors such as DLF, Unitech and Indiabulls Real Estate were especially in FIIs’ good books. In fact, these three firms have seen a huge $1.6 billion FII investment, with DLF getting the lion’s share at $961 million. Unitech and Indiabulls Real Estate have attracted $392 million and $ 247 million, respectively.

The banking and financial services sector has been the second-most favourite of FIIs. They have invested $287 million in Industrial Development Finance Company (IDFC), $281 million in HDFC Bank and $50 million in Indiabulls Financial Services in the June quarter.

According to experts on the sector, valuations of banking stocks were looking up since the start of the financial year. Bhavesh Kanani, research analyst at Share Khan, said: “Valuations of banking stocks were cheaper even in March this year. But on Monday, most of them, except for the mid-cap banking stocks, are fairly valued. Growth in liquidity in the system has led banks to make gains on the treasury front. And that is why they’ve come up with good quarterly numbers.”

In the engineering sector, construction giant Larsen & Toubro (L&T) has seen the largest inflow at $546 million, over three-fifths of the entire investment made by FIIs in this sector.

In the oil sector, Reliance Industries and Oil & Natural Gas Corporation were the top picks with FII investments of $296 million and $88 million, respectively. Analysts tracking the sector said that with the rise in crude oil prices, there were signs of some improvement in the global economy and prospects were better for oil companies.

Foreign investors were not too keen on investing in the telecom sector. In fact, they sold equities of $1.1 billion in this sector during the quarter under review.

RBI against extension of debt recast deadline

RBI against extension of debt recast deadline
Business Standard, August 11, 2009, Section II, Page 3

Anindita Dey / Mumbai

CDR cell, banks had sought extension of Aug 30 deadline for restructuring assets.

The Reserve Bank of India (RBI) is of the view that there is no case for an extension of deadline for restructuring of loans beyond August 30.

In various meetings with banks, RBI has made it clear that it does not think that has been or will be a sharp rise in cases where companies across sectors are prone to fall sick or are becoming financially weak, threatening the financials of banks.

“Rather, RBI feels the economy has started showing signs of improvement and we have given an upward bias in our growth forecast going forward,” said a source close to development.

Not only banks, the corporate debt restructuring (CDR) cell had also made representations to RBI for extension of the deadline for restructuring of assets which ends on August 30 this year.

RBI is of the view that exceptional regulatory treatment of retaining the asset quality even with second restructuring was an one-time special dispensation in response to the stressful economic conditions and the global slowdown.

“Now various sectors have started improving and corporate earnings are good. Even RBI is planning to unwind the stimulus at a suitable time. The primary problem of fund availability is easing, the source said.

If an asset is becoming sick and has systemic implications, banks can always make case-to case representations.

As an example, sources said, banks are discussing with RBI for a special manadate of not treating the Dabhol project as an NPA. This is a Rs 8,000-crore account with banks and declaring it NPA will have a lot of systemic implications.

Secondly, there is no reason why a company should wait so long since December 2008 to approach banks for restructuring of its accounts if it was really facing financial strain. RBI fears that the company may use such special dispensation just to delay paying bank dues even when they have funds.

While there may be genuine cases needing restructuring, special discretion may be used to windowdress the balancesheet. In any case, normal restructuring option is always open to banks when it feels an asset is prone to be an NPA.

Normal restructuring is upgrading an asset after one year of holding it as an NPA by the banks if it is convinced of the company’s new business plan.

Under the guidelines issued in December 2008, RBI had stated, “In the face of the current economic downturn, there are likely to be more instances of even viable units facing temporary cash flow problems.

To address this problem, it has been decided, as a one-time measure, that the second restructuring done by banks of exposures (other than exposures to commercial real estate, capital markets and personal/consumer loans) up to June 30, 2009, will also be eligible for exceptional regulatory treatment”..

Exceptional regulatory treatment means retaining the asset classification of the restructured standard accounts in the standard category.

Normally, when the company or an account fails to service its debt payments to its bank beyond 90 days from the due date, the asset is classified as a substandard asset, then doubtful and then loss on the books of the banks and additional capital provisioning is made with each downgrading. In all three cases — substandard, doubtful and loss — the asset is considered to be a non-performing asset.

In the due course, if the bank is convinced of the feasibility of the business plan presented by the company that it will be able to service its dues, the banks can upgrade the asset but only after retaining the asset in the NPA category for one year from the date of downgrading the asset.

After earmarking an asset as NPA, the capital provisioning requirement towards such cases becomes much more than towards standard asset. Any further advances could only be given after restructuring or board approval.

In its directions, RBI had made a special dispension to allow banks to restructure the asset for a second time so as to recover its dues and even as doing so, the account will be treated as a standard asset and not an NPA which otherwise would have been classified as a NPA.