November 24, 2008
The ongoing financial crisis resulting into an economic slowdown worldwide has not affected Indian housing market much. A recently published report has come up with the figure 20-25%, which is nothing but the average growth rate in the home loans, during the last three months.
The positive trend in the Indian housing loan market is a good news for the banks. Instead of producing any adverse effects, the current economic slowdown has proved to be quite positive for the housing finance companies. It has produced the following desirable effects:
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It has shifted the demand for home loans from real estate speculators to genuine home buyers. This is evident from the rise in small ticket buying, with an average loan ticket size of 20-25 lacs.
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The ongoing economic slowdown has prompted many housing developers to offer discounts as high as 15% on newly constructed or to be constructed flats and apartments. They have also been offering good deals in terms of smaller booking amounts, speedy process of construction and handing over possession, and a good time gap between booking and the beginning of EMI. This has resulted into a rise in the demand for home loans amongst first time buyers.
However, rise in home loans may not sustain for long unless there is a significant cut in the home loan interest rates. We are currently facing economic slowdown which (as discussed above) has left only genuine home buyers, and that too with the home loan size of 15-25 lacs, to buy a house. For this segment, home loan interest rate plays a decisive role. Also, in a situation where our economy along with the rest of world is facing large scale lay offs and pay cuts, more and more people are going through job insecurity. This may compel many potential buyers to either postpone their housing loan or settle down for a budget house.
To pump up the demand for house loans, both banks and the realty sector need to keep the interest of common people in their minds. While banks should cut down home loan interest rates, the housing boards and private housing developers should cut down the prices of homes. This may not be a difficult step to take as banks too have identified that most of the current potential home buyers are first time buyers, who can be attracted through interest rate cuts. The only hindrance on the way can be our inflation which is being tried to be controlled both by the Indian government and the RBI. Any policy aimed at curbing inflation does not support a cut in interest rates.
November 17, 2008
Following the global financial crisis,
the RBI slashed both Statutory Liquidity Ratio (SLR) and the Cash Reserve Ratio (CRR). While SLR was reduced to 24% from 25%, the CRR was reduced from 9% to 5.5%. These cuts in turn released cash into the economy. The resultant increase in the money supply was 1,00,000 crore. All this happened during the month of October. RBI took these steps to improve the situation of liquidity crisis.
The irony of the whole situation is while SLR and CRR cuts were undertaken to improve the liquidity situation in the economy, at the same time government auctioned bonds worth Rs 20,000 crore, besides the regular issue of treasury bills. As a result, the increase in funds were partially neutralized and were not fully available for lending purpose. Today, the situation has started worsening again when RBI declared that most of the banks are once again going through a liquidity crisis. This has prompted the banks to start borrowing from RBI all over again. This means that all liquidity infusing measures undertaken by RBI during last two months have not produced enough desirable results.
According to the data released by RBI, on Nov 12, while only one bank parked a surplus of Rs 15 crore with RBI, 10 banks borrowed a total of Rs 10,990 crore from it under Liquidity Adjustment Facility (LAF). This contrasting picture may be on account of a cap on inter-bank lending and borrowing. As long as, there is an upper limit beyond which one bank cannot lend to another bank, there will always be some banks that will continue to park surplus with RBI, while remaining lining up to borrow funds from RBI.
With few banks still being able to post surplus with RBI, it is evident that not every bank is facing a liquidity crunch. The real problem lies in some of our monetary policies which restrict free flow of money in the inter-bank market. Whenever a bank parks surplus liquidity with RBI, it gets bonds in return and earns an interest on them (currently the rate of interest is fixed by RBI at 6%). In a situation, when most of the banks are not able to take advantage of such an arrangement, it should be understood that there is some problem in our monetary policies. This calls for an immediate action from RBI and Government before the situation goes beyond control.
November 10, 2008
Unit-linked insurance plans, popularly known as Ulips have always been popular amongst investors. These savings instruments offer flexibility to the policyholder in terms of a large number of investment options, besides a life cover. This may be the reason why top insurers, including SBI Life insurance, Bajaj Allianz Life Insurance, ICICI Prudential Life, Life Insurance Corporation, and Met Life India Insurance, among others have together come up with 22 Ulips, once cleared by the IRDA (Insurance Regulatory Development Authority), last week. This is indeed surprising considering the recent market crash. Of these 22 Ulips, 8 are completely new, while 9 are existing Ulips that have been revamped in terms of fund structure.
According to me, the launching of 22Ulips is a good sign for the economy, particularly when an individual investor has lost trust in the market. This will help in instilling confidence all over again in the mind of the investors regarding the market. This will also further emphasize the statements issued by our Prime Minister, Manmohan Singh and Finance Minister P. Chidambaram related to the stability and strength of the Indian banking system. Insurers are also confident of the success of their Ulips, given the handsome growth in the business premium till September end this year, despite equity market crash. They are also of the opinion (which I too believe) that an average investor would always be willing to buy an Ulip even when the market is low, in anticipation of higher returns in the future. This is primarily due to the long term investment nature of an Ulip as opposed to the short term investment nature of other available options such as a mutual fund. This preference towards Ulips have made the insurers to come up with innovative Ulips that could attract a large investor base.
In the current scenario, to make an Ulip attractive to an investor or policyholder, Insurers are all geared up to offer Ulips with better risk management arrangements. For instance, the Ulips recently launched will use a part of the premium of the investors not only towards equity, but also other investment options such as government bonds, and other cash related investments. This will help in minimizing the risk associated with investment in equity. IRDA is also taking every step to stabilize the life insurance business amidst this market downturn. To this effect, it is thinking of prescribing a ceiling on the equity exposure of an investor. Such a policy may go a long way in reviving the market and helping it regain its lost strength.
November 3, 2008
On September, 2003, IDBI Bank took over the Tata Home Finance and renamed it IHFL. Since then, it has been working as a wholly owned subsidiary of the bank. However, now IDBI has decided to sell its housing loan subsidiary. It has already started looking for potential buyers.
What is interesting about the whole incident is the bank’s decision to go for sale of quite a profitable unit. At present, IHFL has 18 centers all across the country, with more than 150 employees. The subsidiary boasts of a home loan portfolio of more than Rs 2,700 Crore. Initially, IDBI wanted to go for a merger of the unit with itself, which according to me would have been a better decision. However, the bank decided to scrap this idea, citing problems related to integration of the two entities, primarily at the front of human resources.
According to me, by selling off its housing loan subsidiary, the IDBI Bank may lose out on the available opportunities of tapping a vast house loan market. The bank’s own housing finance division may not be big enough to cater to the housing loan needs of a big market present in India. With IHFL, the bank has been able to offer varied home loan products to meet the requirements of a wide range of customers. Also, there are many customers who have postponed their decision to go for a house loan owing to the ongoing recession. This means, once the economy comes back on track, there will lie bigger opportunities for a financial institution offering housing loan products.
There is another reason which may go against the bank’s decision to sell IHFL. The ongoing financial crisis on a global scale may prove to be a major hindrance in finding potential buyers for the housing loan subsidiary. The current market downturn may not allow a potential buyer to look for the option of buying a well established subsidiary. Even if IDBI manages to find a buyer, the chances of getting a fair valuation for the subsidiary are dim in the present scenario. This fact has been acknowledged by the top officials of IDBI Bank. They too are thinking of the possibility of postponing the sale, until the market regains its lost potential. If this be the case, IDBI may be compelled to give a second thought to its decision of selling off the IHFL, once it too sees the growth opportunities like never before.
