India small loans: drying up ?

ICICI Bank is said to be withdrawing from lending small amounts (up to Rs 30,000) to sub-prime customers in India. This is seen as a response to press reports and judicial action regarding excesses their loan recovery agents have engaged in. ICICI is reported to have closed down 100 outlets focused on such small borrowers.

Citibank has also tightened its processes for lending small amounts. It requires face to face interaction for every potential customer and a rigorous analysis of cash flow. They suggest that customers should ensure that monthly instalments on loans should not exceed 70 to 80% of their surplus income.

There has been a buzz recently about micro finance in India and how it can bring about financial inclusion. However, current 30% loan loss ratio in small loans is seeing fair amount of panic in the sub prime lending market. Coming back to first principles - a bank/finance company should lend money to only those who show strong signs of being able to pay back. Your local money lender knows that. If he is unsure, he knows how to extract the money - a process that is not easily transferable to the formal sector !

ICICI Bank fined for loan recovery lapse

ICICI Bank in India has been fined Rs 50 lakhs for employing 'goons' to recover loans.

Press Trust of India reports that the Delhi Consumer Commission fined one of India's leading banks, ICICI Bank Rs 50 lakhs for employing 'goons' to recover loans. The commission also deplored the intimidation tactics that ICICI's recovery agents were using on retail customers. In a recent case, some agents beat up a consumer mercilessly and snatched his car (against which there was the loan) away. The commission has issued notices to the Collection Manager ICICI and the CEO of the recovery agency.

Meanwhile, ICICI is said to have started a process to help prevent such incidents in the future.

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.

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.

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.

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. "