Archive for September 5th, 2008

Understanding A to Z of Banking in India

September 5, 2008

I always wait for this report from RBI – The report on Currency and Finance. The previous one was on India’s financial markets. The previous report was for the year 2005-06 and has been a while waiting for the new report.

 The latest report is focused on Banking sector in India and is for the year 2006-08. It is a very detailed report on India’s banking sector across time zones- past, current and future. The theme says:

The Report undertakes an in-depth analysis of the various aspects of Indian banking such as management of resource mobilisation; management of risk and capital, lending and investment operations of banks; financial inclusion; consolidation and competition; efficiency, productivity and soundness; and regulatory and supervisory challenges.

The thrust of the Report is to critically examine the various issues and, going forward, what further needs to be done to ensure the growth of the banking sector in a way that supports/accelerates India’s current growth momentum and enhances the stability of the financial system. Various measures suggested in this Report set out only the broad direction in which reforms in the banking sector could move in future. The pace and sequencing of measures would need to be calibrated keeping in view the degree of comfort in moving forward in a credible way.

The report has already been covered well in the press. What I found more interesting was this study by RBI which says Public sector Banks on an average are more efficient than foreign banks! It has a very detailed chapter on financial inclusion and other aspects of banking.

Happy reading

Understanding the surge in housing prices in India

September 5, 2008

I came across this interview of Deepak Parekh, Chairman of HDFC. It has loads of wisdom on housing markets, reforms, indian economy etc.

First and more importantly his view on housing:

I personally feel that the developers have gone totally haywire. They were buying land as if there is no tomorrow. That was a big mistake.
RBI prohibited all of us from lending money to buy land. In fact, the RBI directive was repeated – first, it was meant for banks but later (it was) extended to housing finance firms too. It expected the asset bubble. RBI had said that banks can only fund the developers after the projects get the commencement certificate. We followed the RBI norms and most of us are safe today.
When we stopped lending, foreign equity flowed in. A host of private equity funds and venture capital funds came to invest in land and they all were promised the moon… phenomenal rates of interest. Most of the transactions were debt transactions from overseas in the garb of equity.
They came through the automatic approval route under FDI (foreign direct investment) and money came in quickly as equity deals do not need prior approvals. They are mostly convertible debentures and preference shares, with conditions that before three years they will be redeemed. The developers borrowed money from overseas to fund their land deals at 18-20% interest. The land prices have crashed but they have committed to pay high phenomenal interest rates. Overall, 60% of such deals could be debt and the rest equity, and my estimate is that between $12 billion and $15 billion (Rs53,160-66,450 crore today) has come through the FDI route.
This is superb and explains what has been going on in the housing markets  in India . I have explained in numerous posts (see this) that despite interest rates rise etc, we don’t see any correction in housing markets in Mumbai. The prices continue to rise. Moreover, the developers expect sales to pick up during festivals and prices to rise. The developers have borrowed money for development and only way it can be recovered is by keeping the prices high. They seemed to have forgotten basic economics – when prices go up, demand comes down.
Where will the maximum correction come?
Is there some more pain coming?
Yes. How will they (developers) pay back? Where is the liquidity? Sales have stopped. Even those financial institutions, who have disbursed money carelessly, will find themselves in trouble as a large number of builders will face difficulty.
We need to categorize developers’ investments in various segments — malls, shopping centres, commercial and residential complexes. The malls have been worst-hit and the residential units the least-hit.
The advantage with the residential segment is even if the prices come down, there is some demand because of the shortages, but the malls are going abegging and people are converting malls into offices.The maximum pain left is in the retail segment; followed by IT, commercial; and the residential segment.
How much pain is left depends on the locality. For instance, in south
Mumbai, there is a shortage and hence prices will not come down drastically as you are not reclaiming more land, increasing FSI and redevelopment is not happening. Where are the new buildings? So, prices cannot go down. But in the suburbs, they can…
I worry about Bangalore, Chennai, Hyderabad because supply was ten times last year. The maximum pain left is in the retail segment; followed by IT and commercial segments; and finally residential segment. I’d think that Mumbai will be relatively less affected because of lack of land here.
I never really understood the concept of building so many malls in Mumbai when housing supply itself is short (see my post here). You see malls springing everywhere. I can understand all this consumption buzz but it has been overestimated. Most people visit malls to just enjoy the cool AC, eat food in the food courts and do window shopping. I have been noting quite a few shops which had taken space in Malls have vacated it. Only big brands are managing to stay float. The question over cheap housing  in Mumbai still remain.
How do you make housing affordable?
The land prices have gone very high and the only way to get cheap land is to do rehabilitate a slum and you can really move fast if there is political support.
Loads of wisdom from the man who is closest to the housing market in India.  I also liked his take on reforms in India:
The Indian economy has had a phenomenal growth till recently. Do you see any missed opportunities?
We didn’t do many things. Particularly, we did not start any large project. There are six steel mills under planning but not even one of them got the (required) approvals. There are problems of land allocation, environment, iron ore, lack of infrastructure…. The Mittals, the Tatas, the Essar group, the Jindals (JSW Group) and Posco, all have big plans but none of them has started construction as yet.
Similarly, I know plans of a dozen-odd greenfield and brownfield cement plants are. For instance, LafargeSA has plans for four states – Himachal Pradesh, Karnataka, Rajasthan and Meghalaya, but not a single project has started. 
If we don’t increase our domestic supply of cement and steel, it’s going to kill us in the long run. In every sector, I see the same thing.
We have been hearing horrendous stories about FCI. Food is rotting there. Has anybody looked at reforms at FCI? Shouldn’t there be a public debate on it? These are all adding to our inflation….
We have killed our fertilizer industry by giving them unremunerative prices. The government subsidy comes after 18 months and banks do not give working capital to the fertilizer companies. I was a director on the board of fertilizer company but I left as the company was turning a defaulter. I could see this coming and resigned very quickly as otherwise RBI would have blacklisted me (for being a director of a defaulting company)

Assorted Links

September 5, 2008

1. WSJ Blog points to Fedspeak – Fisher and Yellen

2. Macroblog says the next release on unemployment are going to be a key

4. IEB has a superb post on political economy of oil

4. TTR says there is nothing to worry about rising interest rates. TTR points to reasons why certain countries win more olympic medals than others.

5. Nudges points how small food packs are dangerous

6. PSD Blog points to some interesting presentations on financial literacy and consumer protection

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