Real Estate Intelligence Service, Wednesday, October 28, 2009

Curtains for easy monetary policy

Curtains for easy monetary policy
The Economic Times, October 28, 2009, Page 1

No Change In Key Rates, But SLR Increased By 1%

Our Bureau MUMBAI

RBI governor Duvvuri Subbarao on Tuesday ended his soft monetary policyaimed at easing the credit crisis last yearby withdrawing liquidity-boosting measures, becoming the third central banker in the world to do so after Israel and Australia. An increase in lending rates is now imminent next quarter if consumer and asset prices remain high. Benchmark rates were, however, kept unchanged.

Mr Subbarao withdrew a special facility that made funds available from banks to mutual funds and finance companies; made loans to commercial real estate more expensive; forced banks to invest more in government bonds; and asked lenders to set aside more funds for bad loans. The special facility was introduced last year to boost liquidity to financial sector firms after the credit markets froze.

RBI maintained the repurchase rate, or repo ratethe rate at which it provides funds to banksat 4.75%; reverse repo ratethe rate at which it accepts deposits from banksat 3.25%; and the cash reserve ratiothe slice of deposits banks have to mandatorily park with the central bankat 5%.

But the central bank surprised the market in its choice of instruments to announce the exit of an easy money policy. The statutory liquidity ratio (SLR), which prescribes the percentage of deposits that banks are required to invest in government debt, has been raised from 24% to 25%, which Mr Subbarao said was a reversal of an exceptional measure. Last year, at the height of the global credit crisis, RBI had lowered the SLR to ease credit flow to industry.

The apex bank also raised its forecast for inflation as measured by the Wholesale Price Index to 6.5% by March 2010, from 5% earlier, as food prices continue to rise on short supply due to the worst monsoon rains in more than a quarter of a century.

We could see stronger action in the coming quarters, StanChart India CEO Neeraj Swaroop said. RBI will wait for stronger data before taking more aggressive measures, he said.
JPMorgan India chief economist Jahangir Aziz also foresees a sharp rise in lending rates if RBI were to hike interest rates later. The Indian Banks Association (IBA)the lobbying arm of commercial bankssaid it expects interest rates to remain stable for a while.

Despite fiscal policy managers saying they want to ensure that there is a solid rebound in growth before interest rates are hiked, the Centre and Reserve Bank governor have chosen a policy that leads rather than follows the market.

HOLDING TIGHT

A non-event

Not really. Without hiking interest rates, the Guv has done enough to hint that rates will harden in a few months. Lending rules have been tightened and a few fire-fighting measures taken during the October '08 crisis have been withdrawn

Whom will it hurt?

Builders and banks. Loans to builders, particularly those setting up office buildings, malls and multiplexes, will become more expensive. Banks will have to provide more, or set aside a bigger slice of their earnings, for such loans, even if the borrower does not default

So, what happens to loans that have turned sticky

Banks will have to step up their provisioning for bad loans. If a loan outstanding is Rs100 crore, a bank will have to provide a minimum 70% (or, Rs 70 cr). This will impact profits of many big banks. Bankers feel RBI should take a relook at this

Has RBI made things difficult for the consumer

No. Banks are not expected to hike interest rates on home, auto and personal loans immediately. But they may in Jan. That's when RBI may hike CRRthe slice of customer deposit that banks set aside as cash with RBIto reduce surplus money with banks

Then, why's Dalal Street nervous

The market was set for a correction and took the hawkish policy as a trigger. Realty stocks plunged & biggies like SBI and ICICI slipped. Besides higher provisioning , RBI said it will not relax the mark-to-market accounting norm on g-sec holdings of banks. So, banks will have to take m-t-m hits as interest rates rise

Is RBI trying to discipline banks

In a way. Besides new loan rules, it will also outline broad rules on the salaries banks pay to their CEOs and senior managers. While RBI today has the last word on CEO pay, there are no guidelines like the ones applicable for bonus payments

H I G H LI G HTS

Keeps benchmark interest rates unchanged

Hikes SLR by 100 bps to 25%

Retains GDP forecast for FY10 at 6%

Says industrial output may revive in the near term

Cuts money supply growth target a hint that CRR may rise

Funds just got costlier for builders

Funds just got costlier for builders
The Economic Times, October 28, 2009, Page 13

RBI move to hike provisioning for realty loans aims to avoid creation of another bubble

Pallavi Mulay & Supriya Verma Mishra ET INTELLIGENCE GROUP

THE RBIs credit policy announced on Tuesday appears intended to rein an incipient bubble in the real estate sector. The provisioning requirement for loans to commercial real estate has been increased from 0.40% to 1%, implying costlier bank loans for the sector. As most of the realty companies rely on bank funding, especially in times of financial crisis, this move could have an impact on the sector.

As banks often keep a cushion for any regulatory changes in provisioning, this measure is more for bringing moderation in the realty sector. Since necessary reduction in prices has still not taken place and there is fair amount of money available for the sector, this step is to avoid creation of another asset bubble , says M Narendra, executive director of Bank of India.

Not unexpectedly, industry officials differ. According to Rajeev Talwar, executive director of DLF, Stability in major parameters is a good sign, but increasing the risk weightage for commercial real estate is a negative signal, which is perhaps not required so early in the economic revival process. It remains to be seen whether this latest measure has the desired impact of curbing any further rise in property prices. Since there is a huge latent demand to be fulfilled, some builders are confident of sales being unaffected by any increase in prices. Indeed, in some cities property prices have gone up by 5-15 % in past two-three months.

But other industry official doubt whether any price increase can be passed on. Property prices are a function of demand and supply and it will not be easy for developers to pass this extra cost to the buyers as many places, especially in central Mumbai and parts of Delhi, have already seen a significant price run-up , says Keki Mistry, vice-chairman and managing director of HDFC.

Sudhir Reddy, managing director of IVR Prime, a southbased builder, says: It is easier said than done that companies will pass on the incremental cost of funds to homebuyers. One must not forget that increase in market price will result in additional construction costs for builders. This will not be possible when places like Hyderabad, Chennai and Pune are still facing a glut in demand. Sunil Malhotra, CFO of Delhi-based Omaxe, says: As demand is still price-sensitive , it will not be easy for developers to pass that extra cost to consumers.

In short, the current measures may not have significant impact on the financials of real estate companies or prices. Tuesdays policy pronouncements shows that the apex bank has become vigilant . Hari Pandey, VP-finance , HDIL, says the increased provisioning will not cost more than 30-50 bps at present.

Provisioning norm to raise commercial realty prices

Provisioning norm to raise commercial realty prices
Business Standard, October 28, 2009, Page 12

Raghavendra Kamath / Mumbai

Developers expect up to 75 bps increase in cost of funds

Developers said property prices were likely to go up after the Reserve Bank of India (RBI) increased the provisioning for commercial real estate. This, they said, would increase the cost of funds.

Developers expect up to 75 basis points rise in cost of funds after the central bank increased banks’ provisioning requirement for commercial real estate from 0.40 per cent to 1 per cent.

“I think affordable housing will become more expensive as banks will raise rates and credit offtake will slow. Availability of bank funds will become a big issue for developers now. We will bank more on our sales and instead of raising additional funds. We will focus more on internal accruals,” said Sarang Wadhawan, managing director of HDIL, a Mumbai-based developer. “Execution of projects will suffer due to lack of bank funds,” said Wadhawan.

A number of property developers such as DLF, Unitech, HDIL and Lodha, among others, have ventured into affordable housing since the third quarter of the previous financial year to beat the slowdown in property sales. The projects are 25-40 per cent cheaper than market prices and carry margins of 15-20 per cent as against the luxury projects’ margins of over 50 per cent.

“It will certainly increase our cost of borrowing. We will consider this increase like any other increase in input cost,” said Bharat Mody, chief financial officer of Akruti City.

RBI increased provisioning as it felt that credit flow to commercial real estate had risen sharply and there had been large increases in restructuring of loans by developers. Some top developers of the country such as DLF, Unitech and HDIL have restructured loans worth Rs 10,000 crore after RBI allowed banks to do so.

“The amount of non-food bank credit going to commercial real estate is very small, I believe around 3.7 per cent. However, our decision was prompted by two considerations. First, the rate of growth of credit through CRE has been accelerating at one of the fast rates. Second, we looked at the restructuring done by banks. While the restructured portion at the aggregate level was 4 per cent, it was 14 per cent for the real estate sector. This prompted us to raise the provision requirement for the real estate sector,” RBI Governor D Subbarao said at a press conference in Mumbai today.

Loans to the real estate sector grew 41.5 per cent in the 12 months up to August 28, 2009, to Rs 96,701 crore. On the other hand, total non-bank food credit grew 13.3 per cent in the 12 months up to August 28, 2009, to a total outstanding of Rs 26,23,551 crore.

In November last year, RBI had reduced the risk weight on loans for the commercial real estate industry to 100 per cent from 150 per cent and reduced standard asset provisioning requirements to 0.40 per cent.

This was after the developers met the finance minister to express concerns over liquidity. Apart from drastic fall in property sales, developers were facing severe liquidity crunch as bank debt and foreign borrowings dried up and domestic stock markets fell sharply.

Analysts said developers would now find it difficult to raise funds. “It will be challenge for developers to get bank debt. Financial closure will become difficult for real estate projects,” said Ambar Maheshwari, director of investments at DTZ, an international property consultant.

However, developers say since many of them have restructured debt or reduced their debt levels, the RBI move will have less impact on their existing loan portfolio. “If we go for additional funding, the cost will be higher. It will not have much impact on our existing debt,” said Sunil Malhotra, vice-president, finance, at Omaxe, a New Delhi-based developer.

Bankers also say the RBI move will not lead to any drastic rise in rates. “This (increase in provisioning) may not translate into a sharp rise in lending rates. The interest rates are already low and any small increase can be absorbed,” said a head of treasury with a private bank.

A senior State Bank of India official said there could up to 40 basis point rise in interest rate on loans disbursed to builders. This would be done to offset the additional amount that banks would have to set aside for standard real estate assets.

Sensex tanks 387 points

Sensex tanks 387 points
The Hindu Business Line, October 28, 2009, Page 1

Our Bureau, Mumbai

The Monetary Policy seems to have disappointed the stock market. The bellwether Sensex shed 387 points on Tuesday to close at 16,353.4 points and the broader Nifty ended the day lower by 2.5 per cent at 4,846.7.

Though there was no rate hike, the RBI signalling the end of its easy money policy led to heavy selling in banking and realty stocks, brokers said.

The BSE Realty index fell by 6.24 per cent, the biggest loser among the sectoral indices, followed by Bankex by 3.82 per cent.

The RBI has made funds more expensive for some sectors. The feeling that inflation is weighing on the minds of policy-makers and a rate hike is likely in the near future unnerved investors. Global cues were also negative. All these pulled the market down sharply, said Mr Avinash Gupta, Assistant Vice-President for Research Equity at Bonanza Portfolio.

Traders booking profits ahead of this month’s Futures and Options’ expiry on Thursday also drove down the market further.

FII were net sellers of equity for Rs 548.7 crore, while domestic institutions were net buyers for Rs 141.5 crore.

The market breadth was negative as 2,287 scrips declined while 442 advanced. All sectoral indices on the BSE ended the day in the red.

Wipro, Tata Motors and Hindustan Unilever were among the few Sensex gainers. The biggest losers included Hindalco, Tata Steel, Bharti Airtel and Reliance Communications.