India property loan rates: ICICI, HDFC differ in views

ICICI Bank and HDFC appear to differ on the potential impact of higher CRR (Cash Reserve Ratio) on India property loan rates.

Reserve Bank of India (RBI) announced yesterday that banks will have to increase Cash Reserve Ratio (CRR) by 50 bp (0.5%), effective from Novermber 10. This means that banks will have to keep this additional percentage of their deposits as non-interest earning amount with the RBI. This is expected to further reduce the amount available for lending.

However, leading banks seem to differ on whether this CRR hike will lead to higher property loan rates. ICICI Bank Joint MD, Ms. Chanda Kochhar feels that this amount of CRR hike can be absorbed and there should be no need for an immediate increase in property loan interest rates. On the other hand, she also clarified that the current low rates offered are only for the Diwali festive period and can be expected to revert back to the pre-festive rates after the assigned period.

Mr. Deepak Parekh, Chairman, HDFC, on the other hand mentions that there is enough liquidity in the system and further lowering of property loan rates cannot be ruled out.

Meanwhile, some public sector banks have acknowledged that deposit interest rates will need to fall further for banks to maintain margins. Interestingly, State Bank of India (SBI) seems to continue wanting to acquire larger deposit market share through attractive deposit interest rates.

This difference highlights once again an interesting arbitrage opportunity: consider taking property loans from HDFC and putting deposits with SBI. As both these giants remain keen to preserve/gain market share in different parts of the retail banking business, you as the retail customer may be able to drive a hard bargain if you are in the market for these products.

Sensex reaches 20,000 – where is gravity ?

Sensex reached 20000 yesterday (29 October). Only a few weeks ago, we were cheering while being sceptical of the 17000 level ! The following factors seem to have driven the market to this new all time high:

• FII (Foreign Institutional Investors) have 18 months to unwind their participatory note (PN) positions. This has led to many of them staying in the market and not withdrawing in a deluge as was thought
• Domestic Institutional Investors (DII) seem to have got into the buying act this time around
• Corporate earnings continue to be strong
• Sensex PE ratio on a six month forward basis is around 21 times and on a 12 month forward basis is around 19 times. Bulls continue to feel that these are acceptable numbers given runaway valuations in China and expected economic and corporate growth in India. In fact, the famous Indian investor Rakesh Jhunjhunwala who is bullish for the longer term, has expressed little surprise at Sensex reaching this summit.

India market cap is at $ 1.55 trillion while China is at $ 3.6 trillion. This now makes India no. 9 in terms of global market capitalization rankings. This market is now one of the top wealth creators in the world: Sensex has returned 60%+ on a year to date basis. Only China is way ahead at 200% +. While we should rejoice at such wealth creation during the festive Diwali season, some pundits suggest caution. They highlight that:

• 60%+ of the 991 point rise in Sensex between October 15th and 29th has been driven by three stocks: Larsen and Toubro (gained by 25% in this period !), ICICI Bank and Reliance Industries
• If you add the next three top gainers i.e. HDFC, Tata Steel and HDFC Bank, you can account for 80% of the recent rise in Sensex
• Bharti Airtel, Infosys and Reliance Energy, who were the drivers of another recent rally, declined by 213.13 points in this period
• FII may unwind as they get closer to the 18 month deadline. Question remains on who would take up the slack in such a case.

Given the meteoric rise of the Sensex, retail investors seem to be jumping in so as to not miss the action. Do remember though, a retreat of Sensex from 20000 to 19000 would mean a drop in value of 5%, if your portfolio mirrors the index. A 20% drop in value would need the Sensex to be closer to 16,000. This comes back to what you are willing to lose – if 20% is your tolerance, your ability to bet on this rising tide would be that much higher.

Health insurance in India: more from your pocket

January 2007 saw the introduction of free pricing regime in the Indian insurance sector. This has meant that insurers are starting to 'price' risk more actively, particularly in health insurance. In practical terms, this impacts individuals who are covered by health insurance policies in the following ways:

• Premiums could have gone up by 30-100 %
• Larger portion on the medical costs need to be paid by the individual, before insurance kicks in
• Approved hospital lists are getting shorter as insurers try to reduce costs.

It is therefore advisable to read your health insurance policy in detail now to avoid surprises when you need the money !

Mobile banking in India

ATM and Internet banking have been around in India for a while. While both modes have had some success, penetration and use levels have been moderate.

While ATMs offer convenience, they pose a perceived security threat in India given instances of mugging around them. Senior citizens and women appear reluctant to use ATMs if they have a choice to go to a branch and withdraw money in safety. The security situation in India shows little sign of improvement and therefore a large scale proliferation of ATMs will remain a challenge. Internet banking, on the other hand, relies on PC and Internet penetration. Estimates suggest that there are approx 40 million Internet users which is expected to rise to 100 million soon – despite this growth, penetration and use levels remain low, especially in non-metro areas. Research also suggests that Internet banking is picking up amongst the target user group.

While Internet penetration and use in India is relatively low, mobile phone penetration is much higher and growing rapidly. There are over 200 million mobile phone subscribers in India and the number continues to explode. Financial services companies are now working with mobile payment players like mChek to offer innovative mobile phone solutions to urban and rural Indian population. Reserve Bank of India has restrictions on non-bank involvement in money transfer. Therefore, development of mobile financial services applications is being sponsored primarily by banks in India.

Economic Times reports that Citigroup has tested a proposition which allows brokerage to respond to margin calls or enhance credit limits, by authorising transactions over the mobile phone. Once the customer and broker sign up for the application, the process is carried out by PIN validations. A one-time PIN is generated for each transaction, which is verified by the customer, after which the bank validates the transaction and sends it to the broker. Once the transaction is completed, the customer is intimated on his mobile phone again. Citi and mChek are also exploring the possibility of a similar offer for mutual funds. They have also launched a mobile application which enables farmers to receive money for sale of produce through their mobile phones. These payments take the form of ‘intent to pay’ information that can be cashed at partner banks.

The paper also reports that Visa recently announced the launch of its Visa Money Transfer on Mobile service, which will enable money transfer via the mobile phone. Initially, this service will be a pilot program available to Visa cardholders of Corporation Bank, HDFC Bank and ICICI Bank. The recipient can be a Visa cardholder of any bank in India and the money can be transferred to his/her mobile phone or Visa card.

Mobile banking has the potential to bring a whole host of people that have no/little access to land lines/Internet connections onto the electronic platform – an innovative way to generate financial inclusion. To do so successfully will require customer training, technology stabilization and managing carefully the ‘know your customer’ issues.

NHB Residex: real estate price index in India

The National Housing Bank (NHB) has launched an index that seeks to track real estate price growth in major cities in India. It is intended to be a broad guide to identify real estate price trends in various areas. The index is called NHB Residex and is expected to be calculated every six months. The first data set tracks prices in key cities between 2001 and 2005:

Residex for select cities (source NHB) - Data for 2001/2002/2003/2004/2005

Delhi: 100 106 129 150 201

Mumbai: 100 116 132 149 178

Kolkata: 100 115 129 148 172

Bangalore: 100 133 170 224 275

This data confirms that all key markets showed significant price rise, with Bengaluru (Bangalore) showing the highest growth rate driven by the IT and BPO businesses. The next set of data is expected in early 2008.

Over the last few years, action has also moved to other cities and smaller towns in India. In fact, some leading developers like Mantri Developers (partners with Morgan Stanley Realty) have indicated that growth in Chennai and Hyderabad is expected to be greater than Bangalore in the near future.

Given growth expectations of the Indian economy, investing in real estate would continue to form an important part of an investor's portfolio.

Sensex crash: SEBI initiates probe, while some retail investors appear to be back !

SEBI is said to be probing the role of various parties, especially top foreign portfolio investors, in the Sensex collapse of 17 October 2007. The stock market (BSE) crashed by 1700 points within minutes of market opening on the back of relatively small volumes. The regulator seems to suspect that trades may have been done at way off market prices with some of the same investors coming in to buy securities at lower prices when markets reopened after the hour trade was halted for. Issuers of Participatory Notes (PN) seem to be under scrutiny.

Meanwhile, some reports suggest that retail investors did not appear to be hurt very badly in the Sensex crash as many may have booked profits at the high levels. Dealers also feel that investors were hurt more by the US subprime led stock market fall in August than this particular crash. In fact, BSE data seems to suggest that retail investors may have bought Rs 1871.22 crores in last three trading sessions end of last week.

It remains anyone's guess how all this will play out in the short term. Volatility can create both significant gain and severe pain - all depends on your risk appetite !

Savings in India: proposed changes to Provident Fund (PF)

If the draft guidelines issued by the government last month take effect, private provident funds will have more flexibility in how they can invest the funds at their disposal.

A summary of the key changes proposed in the guidelines:

• Amount that may be invested in shares of companies listed on the BSE or NSE (subject to being rated “investment grade” by at least one agency) or in Equity Linked Savings Schemes of mutual funds to go up to 10% of total funds, from 5% previously
• 25% of total funds may be invested in deposits of private sector Banks that fulfil capital adequacy and net worth criteria
• Trustees are allowed to decide if a further 30% is to be invested in money market funds, bank deposits or public sector bonds
• Requirement of investment in Central and State Government securities or mutual funds where the underlying assets are such securities, to be reduced.

Should these guidelines be passed, this retirement planning option could yield higher returns. While this is a welcome development, people must realise that the primary objective of a provident fund is to provide sustenance during retirement. Unfortunately, a lot of people withdraw these funds to meet large or unexpected expenses. By doing so, they forgo several benefits:

• When the provident fund in someone’s account completes 5 years (with a single employer or otherwise), the withdrawal becomes tax free. In contrast, early withdrawal requires that the employee pay tax on his or her entire contribution
• The Employee Provident Fund pays a tax free interest of 8.5%, which is attractive compared to many other instruments
• Once can still meet exigencies while not liquidating the corpus since there is a provision that allows the account holder to withdraw funds under specific circumstances, such as medical emergencies or construction of a home.

The provident fund is intended for retirement. As far as possible, it must be protected for this use.

Sensex crash today - could it be a steadying influence ?

SEBI introduced a paper on Tuesday that seeks to restrict Offshore Derivative Instruments' (Participatory Notes) involvement in the Indian stock market. The regulator's philosophy behind this move seems to be to slow the recent deluge of foreign capital flows into the stock market that sent the Sensex to a record high of 19000.

Participatory Notes (PN) have been popular with foreign investors who are not registered as Foreign Institutional Investors (FII) in India and therefore cannot invest directly in Indian capital markets. They get the required exposure by buying offshore derivatives that are issued by financial services players operating in India. Risk of these derivatives are then hedged using India exchange traded derivatives.

This structure appears to have created a four fold problem for the regulator:

1. Ultimate investor identity may not be clearly known as they are investing through offshore derivatives where the risk can be further laid off
2. Facilitates much larger flow of foreign funds than envisaged by registered FII route
3. Money can leave as quickly as it came creating significant volatility in Sensex and NIFTY
4. Foreign inflows have also led to the strengthening of the rupee vs the dollar creating discomfort in some government circles.

Essentially, the SEBI paper suggests that Offshore Derivative Instrument exposure which have underlying as Indian exchange traded derivatives unwind positions over the next 18 months. This sent the market into a major selling spree resulting in loss of 1000 points in early trading - triggers were hit and markets were suspended for an hour. Trading has resumed and some of the loss seems to have been recovered though Sensex is still in the red by about 800 points at the time of this post. Market analysts expect that there could be further unwinding of positions and therefore market volatility could continue for some time.

The government has clarified that it does not plan to ban Participatory Notes but is seeking to moderate capital inflows. The government continues to encourage investments by registered Foreign Institutional Investors (FII) and is seeking to reduce the complexity of registering as a FII.

Can the retail investor now hope for more realistic pricing ?

Send money to India: Internet remittance

Non Resident Indians (NRI) and Persons of Indian Origin (PIO) remit several billions of dollars to India each year. A lot of this is in the form of small amounts sent to family members.

There’s a chance that for some of you who have been at the receiving end, the process of getting money from overseas could have been an inconvenient experience. The traditional ways of remitting money come with several encumbrances. You would have found that it takes time to cash cheques, and large charges are levied by the banks. Or in the case of a wire transfer, you could have a tough time trying to locate where your money is held up in the correspondent bank network.

But all that has changed. Communications technology has made the business of international payments fast, flexible and even free at times. The more proactive private banks such as HDFC and ICICI have started Internet based remittance services, to serve the needs of those who send small to mid sized amounts back to their home country. Non banking company, Times of Money has also been active in this business.

Now, if a relative overseas wants to send you money, ask him or her to log on to the website of any of the banks that offer Internet remittances. Upon completion of a simple account verification procedure, he or she is given a tracking number, which will enable the transfer of funds online from his or her bank account to where it is destined.

Not only is this process simple and paper free, it also gives the remitter a measure of control, since the tracking number helps him or her know where the money is at any given time.

What’s more, money can be sent to remote locations easily. The banks will either transfer the money to their nearest banking branch or deliver a demand draft to the recipient’s doorstep. Even the delivery options are flexible – payments can go into a bank account, be handed over as a draft or be credited to a debit or ATM card.

For the remitter, one more advantage is that there is no need to hold an account in the bank that is being used to make the transfer. Money can be transferred from any of their accounts, even through PayPal.

At a US$ 3 to 5 transaction fee for transfers up to US$ 1,000, online remittances are way cheaper than wire transfers. Even this fee is waived for higher amounts. One can also specify the exact amount that is to be credited in Indian rupees, if need be.

Usually service providers quote a delivery of 3 to 5 working days. That works well for most people. Some online remittance services “guarantee” that the money will be delivered – since all the current players are of high repute, and have the necessary infrastructure and security systems in place, guaranteed delivery is implicit anyway.

The only limitations are regarding the amount of money that can be transferred at a go and within a certain duration, which is of the order of a few thousand dollars. Some banks allow higher transfers in special cases. Also, only those based in select countries can make Internet remittances to India.

But for a lot of people who want to send some funds to the folks back home, the system works well enough.

Falling home loan rates in India - time to rejoice?

HDFC, ICICI, SBI and other banks have announced lowering of their home loan rates. Some of them have emphasized that this lowering is a 'festival offer' and applicable to new customers applying for variable rate home loans over the Diwali period.

Fixed rates continue to remain high. By itself, this is an interesting issue - if banks believed that interest rates have begun a downward trend, they should have sufficient incentive to lock in customers in to current high fixed rates as opposed to guiding people to variable rates. Variable rates are generally encouraged by banks when interest rates look like they may be going up. Market analysts suggest that this anomaly is due to high liquidity in the market. We remain unsure and think that should banks figure out rates are finally in a downward trend, fixed rates may also start to decline.

Declining home loan rates are generally good news for borrowers. However, do keep in mind the following:

1. Lowering rates in a growing income scenario improves affordability. A galloping Sensex only makes people feel even wealthier. Better affordability has been one of the driving factors of rapid real estate growth and price rise in India over the last few years.

2. A feeling of growing affordability can harden real estate prices and re-ignite demand. Therefore, while rates are going down, your dream home may get more expensive.

3. Lowering of rates are currently valid only for new customers. Rates for existing customers are typically linked to a 'reference rate' by each bank/HFC (housing finance company). These reference rates are generally not reduced that frequently creating a time lag for existing customers to benefit from rate declines.

4. If you are an existing home loan customer, you may want to consider exploring refinancing (balance transfer loan) at the appropriate time. For example, Indian banks and HFCs have an exit clause of 2% of outstanding amount - should your rates be higher than new rates by 2% + costs of setting up new loan (e.g. Rs 5000 or 0.5%), you may want pull out your calculator and have a serious discussion with your banker!

Gold prices in India – time to rush in ?

Internationally, gold prices have risen strongly since 1999. Today’s spot price is the range of US$ 735 per ounce. It must be remembered that despite this rise, prices have not reached the peak reached in 1980 (US$ 850 per ounce on 21 January 1980). Recent price rise appears to be driven by global financial worries, lowering US interest rates and strong demand in China and India.

Gold prices in India are expected to continue rising. ICICI Bank is reportedly pricing gold at approximately Rs 9550 per 10 gms. Spot price of gold today (8.10.2007) on MCX (Multi Commodity Exchange of India Limited) was at Rs 9461 per 10 gms, while the 05 Dec 2007 contract is priced at Rs 9510 and a 05 Apr 2008 contract priced at around Rs 9715. Some commentators expect gold prices to touch Rs 9800 by December 2007.

Resident Indians and NRI, both maintain a keen interest in gold due to social reasons. However, if this expected price rise is seen as a reason to rush in and buy gold for investment – investors need to stop and consider for a moment that the expected price rise in India is equivalent to a 10.5% pa growth rate. India bank deposits (e.g. with SBI, HDFC Bank) can get you more than 9 % pa and therefore a 10.5% return on an asset class where prices fluctuate seems moderate.

There has also been a perception that gold acts as a long term natural hedge against inflation. Data from the US does not necessarily support this assumption. If gold prices were to have kept pace with US inflation since Jan 1980, current price should have been US$ 2100 per ounce!

Indian investors should also be aware, that while gold prices in dollars could strengthen, a weakening dollar could mean a slower rise in gold prices in rupee terms. Some are expecting the Indian rupee (INR) to get to Rs 39 per US Dollar by December 2007, which in itself could create additional challenges for the Indian economy.

Buying a house or apartment in India today – what should you worry about ?

Home loan rates in India have started dropping, real estate prices have been soft for 9 or so months – you must be wondering whether this is the right time to buy that house or apartment/flat in India. Here are some thoughts for you to keep in mind:

1. It is recognized that there is a shortage of dwelling units in India. Sustained lowering in interest rates can reignite demand and therefore raise prices again

2. Price softening has happened primarily in outer areas of metros, while prices within the main cities like Delhi, Mumbai, Bangalore and Chennai have remained strong. In fact, prices in well known residential areas in these cities are now way higher than what most residents in the city can afford. This has been primarily due to shortage of land in such localities while demand has kept rising with growing wealth disparity in India

3. Outer areas of metros suffer from lack of infrastructure and security making it less attractive for people to live in these locations. Therefore, a significant portion of money that has gone into such locations has been investor money. Such locations are easily hurt by lowering of demand due to interest rate hikes

4. Land titles remain a major issue in India, except in areas approved by local authorities. With large amount of private equity money seeking large land deals, price of large tracts of ‘clean titled’ land and apartments/flats built on them keeps going up. However, unless demand for such properties/complexes in outer areas firm up, one can expect a flattening of prices here

5. Significant number of apartments/flats in such large complexes has been bought by NRIs and investors from outside the city, based on promising brochures. Unless you are able to assess the land and builder quality yourself, you are always at risk of being led astray by these promises.

As ever, the best way to buy property in India is to focus on areas approved by the local authorities and within accessible distance to key city centres. It will be a long time before India has road and metro infrastructure to enable people to live comfortably in more distant suburbs.

Loan recovery business in India - the ugly side

The following report from IBNlive illustrates the scary nature of this evolving business:

" By IBNlive.com

Wednesday October 3, 09:01 AM New Delhi:

Standing tall at 5 ft 11 inches, Lucky is a daunting and an imposing sight on the streets of Delhi. This 38-year-old has just started a detective agency of his own, but that's only a front for his real job. Lucky is a recovery agent. Big private banks hire him to make sure their loans are returned on time. Eighteen years in the business and he knows exactly how to get customers to pay up.

“We threaten people, we land up at their place and sometimes even use third degree,” he admits to CNN-IBN.

Welcome to the world of corporate sponsored violence, a dark underbelly of the swanky banking sector where local goons and ruffians are hired by banks to terrorise customers into settling their dues.

Where threatening calls, verbal abuse and even physical violence have become part of routine collection system.

These recovery agents are not on any bank's rolls but stand to get a hefty cut of booty they help recover.

“Not just lathis, some agents even pull out their mousers, they stop cars on gunpoint, drag the owners and drive away with the car,” Lucky says.

Sixty-year-old Surinder Kumar runs a consultancy in west Delhi. Two months ago, he fell victim to recovery sharks when one of his employees defaulted on his Rs-50,000 credit card payment to HDFC bank.

“He abused, used filthy language and threatened us. They said our kid has been picked up. We were very scared. I wondered if we should stop sending him to school,” he recalls.

Surinder is just one of thousands of people who've seen the ugly side of loan recovery process.

Blame it on over-aspiring consumers who borrow more than they can return or overzealous lenders who then bend the rules to recover their debts, the paranoia continues.

This corporate tactic has also turned deadly with a spate of suicides. Two weeks ago Prakash Sarvankar of Mumbai, harassed by ICICI banks recovery agents, was forced into taking the extreme step.

For the likes of Lucky and others in his league, it’s just another job. “I feel bad about my job. But if I don't do it, someone else will,” he says.

Gandhi may be stamped on the currency banks lend, but there's nothing Gandhian about the way they go about recovering it. "

Risk appetite for individual investors in India

Exuberance in stock markets (Sensex), of the type seen recently in India, often leads to individual investors behaving in one of two ways:

• Investing with the herd
• Never finding the right level to enter the market !

Both these outcomes have the potential to be painful for individual investors. When you invest with the herd, you are never really sure if you are picking ‘yesterday’s’ good news and therefore buying at close to peak. On the other hand, if you stay out of a rising market for too long, you are likely to miss out on significant gains. What should an investor do in such a case ?

It comes back to thinking of investment as a long term game and building a diversified asset portfolio that meets your risk appetite as you go through different life stages.

A popular yardstick to understand one’s risk appetite for equities is to measure it as ‘100 – your age’. For example, if you are 40, this yardstick suggests that you can have approximately 60% of your asset allocation in equities. In our opinion this yardstick need not be correct for many investors. Risk appetite is a personal matter and it can vary based on an individual’s situation and age.

Some believe that it is better to have an investment strategy built around how much you are willing to lose as opposed to how much you would ideally like to make. Risk appetite could then be defined as how much of value you would be ready to lose over short /medium term (up to 3 years). If the answer is 40 to 50%, then you obviously have a high risk appetite and are investing for the longer term (e.g. 10 years). In such a case, a relatively higher proportion of riskier assets that can outrun inflation by a significant amount could make sense. Investments in stocks, particularly in emerging technologies, mid caps, etc could give you the upside in such situations.

However, if you are willing to lose no more than say 10 to 15% of your investments’ value over the short/medium term, then you can be classified as a risk averse investor who could be better off with more ‘secure’ investments like bank deposits, etc.

If you have the heart to lose between 15 to 40% of your investment value over the short/medium term, you could be classified as a moderate risk investor. In such cases, your portfolio could contain balanced mutual funds that diversify your risks and have about 65% of their assets in equity, the rest being in ‘safer’ instruments.

Please recognise that the investment percentages talked about above are primarily for liquid assets – i.e. do not include property which typically forms a large portion of many investors’ portfolios. Also, the risk appetite percentages of 10-15%, 15-40% and 40-50% are indicative.

We will talk about what a typical portfolio might look like for these three investor classes in a subsequent article.