WHAT IS WRONG WITH US?

Saturday, 20 November 2010

Between the rock and a soft place
Mood:

don't ask
Now Playing: Why Deepak Parekh should change his usual line of argument
Topic: Real Estate Conundrum

The government has a two-pronged approach to housing sector, one that of preventing bubbles, which ends up strangulating the industry and second, complete apathy towards formulating policies to help meet the burgeoning demand.

By Anil Parameswaran Nair

The latest video on youtube.com (https://www.youtube.com/watch?v=Ps0DSihggio) on constructing a 15-storey building in six days in Shanghai is probably the most forwarded link among the real estate professionals today. It would be instructive if critics of teaser loans and 10-90 loan schemes like Deepak Parekh saw it.

The central bank of India in early November tightened the provisions for housing loans which singularly created a dent in the real estate growth story. The higher provisioning requirement for teaser loan rates will, in all probability, affect the sector in the short term.

The motive behind the move by Reserve Bank of India (RBI) is essentially to prevent excessive leveraging by banks. Most market watchers are of the view that if the RBI starts to take such punitive action against financial instruments brought out by innovative thinking, the real estate sector as a whole will suffer. It is true that the regulators have held the industry is good stead in the past and have prevented market bubbles, but the over-caution might be uncalled for.

The fact of the matter is that asset prices might be rising inexorably in some markets though in others they are more sobering, mostly due to demand. A market like Goa has seen stabilised pricing for the last decade, even during the previous economic downturn, so much so that asset buyers and investors have increasingly flocked to these markets in tandem with the construction activity.

“The asset prices will not be brought down by simplistic moves like higher provisioning requirements for loans in a demand-led economy. The government has to increase FSI across the board and improve infrastructure development to control prices”, said a leading NCR-based real estate developer during a recent conference on hotels and organised retail in Mumbai.

The regulators have an uncanny detailing of the property sector than any other industry. The central bank capped the loan-to-value ratio for housing loan exposure at 80 per cent, even while increasing risk weightage for residential housing loans worth Rs75-lakh or more by 125 per cent.

The RBI in its combined wisdom raised the standard asset provisioning by commercial banks for teaser loans to 2 per cent from 0.4 per cent. This step seems wholly unnecessary in view of the sector’s struggle to come out of the slump seen a year ago. Even stock markets gave RBI a thumbs-down when the markets tanked after its decision mostly because of the ‘negative surprise’.

In other words, for all outstanding teaser loans the banks will have to make a one-time additional standard provisioning of 1.6 per cent. Also, in future they will need to take into account these additional standard provisioning norms if they continue with the teaser loan schemes.

It is not just the developers and intermediaries which are cut up with the decision of the central bank. Commercial banks which have been forced to look the other way when developers seek debt financing, have also expressed their chagrin at measures like tightening provisions for loans.

In the mid-term review of monetary policy, RBI raised provisions for standard assets of teaser loans five fold. The ostensible reason is that last time the RBI tried to control teaser loans the banks conveniently bypassed it and continued to selective offer teaser loans. This is not to say that all such loans are above board, but to club them all in one basket is a mistake that RBI commits with impunity.

The higher provisioning will jack up cost of funds for banks and discourage them from aggressively pushing for teaser loans. The reason for such tight measures is that such loans affect the quality of assets and chances of defaults by borrowers are high. The RBI might also be playing into the SBI versus HDFC game being played out in public for a long time now.

The home loan default for SBI, for instance, is known to be about 3 per cent and that can be considered an industry average. This kind of default in payments does not usually affect the balance sheet of banks like SBI because mortgages as a percentage of total assets are very low. Of the total loan portfolio of Rs80,000-crore, special loans would be in the vicinity of Rs20,000-crore.

Even HDFC’s teaser loan portfolio is about 27 per cent of its retail home loans provided. HDFC’s mortgage book, it is known, is around Rs1.06-trillion and retail loan makes up about 68 per cent of that.

In regulation of loan to value (LTV) ratios the RBI has said that banks will be able to give up to 80 per cent loans to Rs50-lakh worth property. Till now the LTV was unregulated and banks used to give up to 85 per cent loans. In many of the developed and a few developing countries the LTV is regulated, but the government also helps people to buy houses in terms of down payment assistance for first time buyers.

In India the government has no such plans or provisioning and hence the lower end of the market, where the demand is real and bereft of investor-buyers, will be adversely affected. In the higher end of the market, which includes even affordable homes in some metro cities and luxury in smaller cities, the new regulation will not mean any thing.

There is little speculation in the higher end of the market even today and hence the increase in risk weightage will dampen the 10-90 schemes popular in cities like Mumbai where the down payment is broken into two parts – 10 per cent while booking and 5 per cent while taking possession.

But most big developers any where in the country are not quite given to taking these measures as a bad thing, more because the economy is growing and the demand will only firm up even more. The price and demand have not been affected in the festive season which ended recently.

Pricing in real estate can only be controlled by increasing supply in housing segment. Even if the floating rates for housing loans are likely to rise, developers don’t see any denting in the demand – it is almost like the Shanghai building which rises tall in six days to 15 storey. But the point that is moot is: will the approvals in India come so fast to build a structure of that kind?

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Posted by Anil Nair at 8:48 PM

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Friday, 5 November 2010

US President's visit could be harbinger of change
Now Playing: India can benefit only if the govt plays the cards well
Topic: INDO-US RELATIONS

“We don’t want to be part of arming you against India, so let me be very clear about that”, US President Barack Obama told Pakistan President Asif Ali Zardari a few days ago just as his plans to visit India on a business trip firmed up. There is much of agonizing heartache which Pakistan can’t hide, so much that the border districts of Jammu and Kashmir have been getting an artillery pounding from across the Line of Control.

But then, the biggest fear that Pakistan has is that the business emphasis of the US President’s visit can relegate its pet peeve Kashmir to the back-burner as India and the US warms up to better relations like no other President did in the past. President Barack Obama is slated to be in India for three days, which is by far his longest visit to any country yet.

Though there has been trouble on the outsourcing front as pointed out by this magazine a few weeks ago, the market size of India is the biggest draw for any US President. Coupled with that is the fact that the US will always look to India as a countervailing force to hegemony of China in the region.

The benefits for the US in dealing with India and its burgeoning market is that it can hugely affect US corporates, especially in the FMCG and retail sector. Wal-Mart CEO Mike Duke has repeatedly said that the direct effect of allowing FDI in organised retail will be in controlling inflation. Prices of agricultural commodities will plummet if organised retail sector gets the FDI fillip in expanding to rural unexplored areas, just as the farmers would get better realization on their produce.

President Obama is coming along with a high-powered business delegation which includes CEOs of many Fortune 500 companies. The delegation’s main agenda would be about outsourcing of information technology services, entity list, science and technology agreements, social security tax and aviation. The discussions will take place with Indian counterparts on November 6.

It is to be noted that Obama’s predecessors George Bush and Bill Clinton also addressed Indian industry leaders when they visited India during their tenure. The visit of President George Bush, whom Prime Minister Manmohan Singh once addressed as India’s best friend, had a better rapport with the Indians than Bill Clinton, though the picture of Clinton dancing with the tribals in Rajasthan is etched in the minds of Indians like none else.

Even if the agenda of the US President is quite a secret, news reports suggest that the US-India Business Council (USIBC) will jointly host a day-long seminar with the Confederation of Indian Industry (CII) and Federation of Indian Chambers of Commerce & Industry (FICCI).

It is also known that Terry McGraw, USIBC chairman would lead the US delegation. Just as in previous US President’s visit to India US secretary of commerce Garry Locke, treasury secretary Tim Geithner, and agriculture secretary Tom Vilsack are expected to be accompanying the delegation.

There is also speculation over `entity list’ which will figure in the talks between the US President’s delegation and their Indian counterparts. The entity list contains names of companies and individuals dealing in `sensitive’ areas.

The US Export Administration Regulations (EAR) put out by the US Bureau of Industry & Security (Department of Commerce) contain a list of names of certain foreign persons that are subject to specific licence requirements for the export, re-export and transfer of specified items. The list includes businesses, research institutions, government and private organisations, individuals, and other types of legal persons. It is this list which India would like to see altered.

Another area of contention is aviation. The penalty for late delivery of commercial aircraft to India could also figure in the talks. For many Indians visiting US on short term visa there is this crying need to alter the social security tax paid.

India is quite clear on what it wants on this issue – businessmen paying tax in India should be exempted from social security tax in the US when they are on a short-term visa. It is estimated that if India gets this leeway there could be an annual saving of $1.5-billion.

Beyond business, India is seriously concerned with the delay in full implementation of Indo-US civilian nuclear agreement. After the hype over the deal which was much to the chagrin of Pakistan, Obama Administration has been squarely blamed by Indian government for the delay.

But more than seen in the public eye about business and trade which can keep the constituencies in the US as well as India happy for US President Barack Obama and Indian Prime Minister Dr Manmohan Singh, the tenor of dialogue on various terror related issues would decide how life will be different in the near term for both countries.

Pakistan’s complicity in terror attacks in India is beyond doubt and the US President’s statements have increasingly been over the edge, almost as if there is an attempt to control his fury. And the US has every reason to be furious at the double game played in India’s neighbourhood in the name of freedom and azadi.

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Posted by Anil Nair at 6:21 PM

Updated: Friday, 5 November 2010 6:30 PM

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Tuesday, 20 July 2010

Red Alert is green signal to development
Mood:

celebratory
Now Playing: Movie Review
Topic: Money and honey

MAOIST and Naxal killings are now coming closer to our cities, according to latest intelligence reports. And Bollywood is going into the hinterland to find out what went wrong in the villages for people to be carried away by the violence. It takes some guts to break the cast and take an opposite view, and that is what director Anant Mahadevan’s latest flick is all about.

Red Alert, unlike most Bollywood movies, dares to take a violence-is-not-romantic thrust and is powerfully delivered. The characterisation of the protagonist played by Suniel Shetty, of an indigent villager trying to eke out an earning out of odd jobs is almost convincing, except for his gym-toned biceps.

The movie’s final moments preserve the unpredictability, but the pro-development message is not lost on the viewers, even if it is targeted at the city audience. Wonder, how many people in Indian villages will get the chance or make the choice of watching the movie, but the idea seems to be about engaging the middle and upper middle class city-dwellers, who are so influential in government policy making.

In the aftermath of Union Home Minister P Chidambaram’s open admission that he was not able to take appropriate action against Naxal violence for dissenting voices in his party, it is not clear if the film deliberately has taken a dig at the haphazard way the local police and Central Reserve Police Force (CRPF) have been playing a cat and mouse game, often resulting in CRPF jawans getting killed in large numbers.

But the extreme Left philosophy of violence, which is quite often misdirected at soft targets, is torn to smithereens. The corporate world has always been at the receiving end of the Left philosophy.

Though the film does not go all out to defend rampant industrial development at the cost of the poor land-owners, the moral of the story that comes out loud is that wealth creation and distribution is the panacea for most societal ills. "Employment for the youth, State support for entrepreneurship and a peaceful lifestyle can wean away poor people from the treachery of Naxalism", says Vinod Khanna as a Naxalite-turned-entrepreneur. What the movie intends to do knowingly and inadvertently, is to propagate the idea of change, a change in the middle-class thinking.

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Posted by Anil Nair at 2:14 AM

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Sunday, 18 July 2010

Chandni Bar
Mood:

chatty
Now Playing: Mumbai is real estate scandal capital
Topic: Real Estate Conundrum

In the late 90s there was this controversial restaurant at Churchgate in Mumbai which had an on-going pitched battle with the residents of the same building over the illegality of its expansion plans. The restaurant had gradually encroached on the pavement, and despite the residents’ clamour the municipality did nothing to bring the erring restaurant owners to book. The effects of hafta looked so obvious.

The story died a natural death in the media after the first few weeks of intense reporting. A few days ago, when Aditya Dube, all of seven years, went flinging down six floors and crashed to death because the restaurant had put some make-shift asbestos on the floor on which the kid stood, history was repeated.

Many of the restaurants in Mumbai have scores of illegal activities, and just as real estate business or Bollywood movies where accounting standards are followed by few and far between, only because there is so much leeway to fudge numbers. One restaurant owner from Mumbai’s suburb Mulund told this reporter that the food that is “made and sold in any restaurant can never be quantified in terms of plates or glasses”. So there is this natural proclivity to cook up the books and evade taxes.

Evasion of taxes comes with its set of spin-off effects, and that is mostly to do with sharing the booty. Restaurants in Mumbai which have special rooms for police and other 'trouble-making' authorities, are common in Mumbai. And so is the sight of police jeeps on their evening patrol taking away crates of beer bottles from bars and restaurants.

Some years ago a Bollywood movie by the name Chandni Bar created so much of a moral turpitude that taxi drivers in Mumbai would refuse young college-goers a ride to the nearest bar in the evening. Though the movie, as Mahesh Manjrekar is wont to, has a strong moral message, some of the scenes were revolting. The protagonist – an upright police officer, is shown slapping customers having beer at the ladies bar, because according him, it is immoral to drink in such a joint!

What Bollywood missed is the real story in such restaurants. The sleaze is in the money that is earned, deployed and exchanged. Customer taste, as in any city’s night life, is not the real issue. Just as the illegality of It’s Mirchi, the sixth floor restaurant from which the seven year-old Aditya fell to his death, its sister joint in the basement Ramee Guestline also has a lot of worms crawling out.

The police are currently investigating the group’s owners and the board of directors, and “the owners would by default be held responsible for any negligence on the part of the hotel staff”. But knowing the history of such cases, one should not be surprised if it is business as usual after the dust settles. Probably, the hafta this month would be exorbitant. That's it.

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Posted by Anil Nair at 11:03 AM

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Monday, 14 June 2010

Man in the mirror
Mood:

cheeky
Now Playing: Devil's Advocate
Topic: INDIAN HYPOCRISY

So the three villains this month were Narendra Modi, Warren Anderson and Tony Hayward, and I don’t know if it is in that order. Warren Anderson, former CEO of Union Carbide, is all of 89 years old, retired in his luxury villa. Wonder why it took so long for the judges to come to this conclusion that Warren is actually not culpable. Compare this with the Ajmal Kasab’s case. If the judiciary wants, it can get the verdict out in just a year. If not, the case can be dragged on and on, and don’t be surprised with the verdicts being handed down to the great grand children in their 40s who couldn’t help but snigger at the idiocy of the Indian judiciary.

I remember vividly when the Bhopal gas tragedy took place there were several of my friends whose relations were affected or had a close shave at Bhopal. I was in collage then and as any college-going kid full of idealism, we took to the streets. Warren Anderson had to be hanged, we said.

During a nature trail with about seven close friends in the early 90s to Bhimashankar hills, we ran out of batteries for our Sony Walkman(s) and cameras. We could spot a small grocery vendor at a village at the foot of Bhimashankar hills, whose only protection against the rain and sun, was an awning swaying in the heavy breeze. The shop owner could offer Eveready batteries, and none else. We needed all the stock he had of about 12 batteries. But after almost an hour of heckling with my friends over the chances of our equipment getting damaged because of the abysmal storage conditions at the shop, we did not buy any battery from him. But none of my friends ever came to know that my real concern was not the storage condition of the batteries at the shop but my antipathy towards Union Carbide.

I have tried not buying Eveready batteries ever since the tragedy took place as it was manufactured by Union Carbide. I would prefer Nippo over Eveready. Today the world has changed, and Eveready belongs to a different company – and even after Union Carbide sold its battery products division to Ralston Purina Company for $1.4-billion in 1986 I have never bought that brand of batteries since.

Just last week when I was in Kerala, an incident took place which left me shaken if not stirred. I was travelling from Angamali to Thrissur by a State Transport bus, much out of choice – it is always good to be with local people in a bus than engage a private vehicle.

Near Chalakudi, the old rickety bus went over a pothole at high speed, the effect of which was enough to send the passengers at the rear end up the air. One of the passengers in the last row who was holding himself steady by keeping his feet under a wooden box, went up in the air along with the rest only to scream in pain when his left foot held under the box, broke. There was no bleeding but the passenger was writhing in pain. It took some effort to convince the bus conductor and the driver that the situation was grave enough for them to seek medical help for the passenger. To cut the long story short, after about half hour at Chalakudi, the victim’s relations turned up to take him to hospital for treatment. Neither the state transport company nor the driver was held culpable for the pain, agony and the expenses of the passenger. What is noticeable is that Kerala is a state so progressive that Nobel laureate Amartya Sen considers it to be a model state.

If Warren Anderson is at the twilight zone of his life trying to figure out everyday if he would be alive till the evening, Indians are past master in the game of procrastination. Incidentally, it is even more surprising to see the international reaction on the BP oil spill off the Mexico coast, where the perfect scapegoat is the CEO Tony Hayward.

Let me give you another analogy, I hold a savings account in a leading British bank, which took 21 days to transfer some ten thousand rupees into the account. It was promised to me that the transfer will take place by the end of day one. When it didn’t happen over the next few days I lodged a formal complaint, and then the bureaucratic juggernaut started to roll. There were at least 8 calls to and fro made to ascertain the status of the transfer of funds. By the end of 20 days I lost my cool and when the conversation become a little uncivilised the transfer was made.

I remember Sucheta Dalal writing in her column in the Indian Express called Different Strokes on how banks and financial institutions involved in stock market dealings use money in transit to dabble in the markets. Today, the settlement period in Indian stock markets has been reduced to T+2, which is by any measure, a world standard. But when it was a month or even a week in the late 90s, the institutions would use the funds from the sale of your stocks to trade in the market and make money on the side.

Now I don’t know if there is a Harshad Mehta lurking in the markets using banks funds to play the stock markets, but the 21-day period taken to transfer funds is unacceptable. And by the way, did anyone lose their job for the muddle in the fund transfer? Then why is that even Barack Obama finds the idea of sacking Tony Hayward a sexy idea to raise his stocks amongst his voters?

Let’s look at what has happened in the Gulf of Mexico? There has been an oil spill which is unparalleled in the history of mankind. So, everyone is expected to shake their head in indignation and seek justice for the whole lot of living beings in the ocean which have lost their lives or are maimed beyond recognition. Is the indignation a matter of convenience for all of us, just as it is for the US President? The oil and gas industry is the biggest culprit of carbon emission, and global warming will lead to the extinction of mankind sooner than later. Is the oil spill in Mexico a bigger environmental issue than global warming?

When the world discovered the mad cow or the bird flu disease, what did we do – give up eating that stuff. So when we are so riled up over the oil spill why don’t we simply decide to give up oil and gas consumption?! No one is even suggesting that. Instead we find a perfect fall guy in Tony Hayward, as if by his sacking the evil of oil leakage will be fixed.

If it is about his culpability, it is too plaintive to think that his sacking will dissuade others from being lackadaisical in taking strong measures to prevent such misadventures in the future. Leakages from an oil rig are only as common as a news channel getting its facts wrong while broadcasting news. How many of us have got away by issuing corrigendum. Once the Time magazine, while writing about our former prime minister Atal Bihari Vajpayee, got every bit of facts wrong – his age, his place of birth, his medical condition, his treatment, et al. It was a classic case of what journalism ought not to be. Did any editor in Time lose his job for that report? Remember, the Mahatma had said quite poignantly, “when you point your forefinger at some one realize that the other three fingers are pointed towards you”.

And the third case is the most ridiculous of all of them – the Narendra Modi muddle. Nitish Kumar in a public meeting held Modi’s hand up in the air in a show of camaraderie to lustily cheering crowd. Now when Modi has issued ads to prove his secular credential (whatever that means) Kumarsaab is breathing fire and brimstone. Secularism is something I could never understand, just as the term ‘terrorism’. But my point here is plain and simple. If a person is caught by the police, do his past connections, his Facebook friends and phone book records also not become suspect?

On what ground is Nitish Kumar making such a huge noise. If he was so against Narendrabhai then why did he team up with him earlier? I suspect there is something more to it than meets the eye. The two together must have decided together to create a public ruckus over the issue only to put the Congress in its place. If you see the two have everything to gain and nothing to lose from the public wrangling. So the best thing for all of us again is to go and look at ourselves in the mirror. The message is clear and loud.

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Posted by Anil Nair at 3:58 PM

Updated: Monday, 14 June 2010 4:17 PM

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