Monday, December 22, 2008

How India Avoided a Crisis

NYTimes article on what could have been a super inflated bubble in real estate. The article reproter fails to mention that black money and corruption was responsible for the spike in prices. Reddy left the private equity folks, hedge funds and "Black Money" to take the risk of escalating land prices. These folks are the sub-prime of India. Not the bank.

“What has taken a number of us by surprise is the lack of adequate supervision and regulation,” Rana Kapoor was saying the other day. “This was despite the fact that Enron had happened and you passed Sarbanes-Oxley. We don’t understand it. Maybe it’s because we sit in a more controlled economy but ....” He smiled sweetly as his voice trailed off, as if to take the sting off his comments. But they stung nonetheless.

Mr. Kapoor is an Indian banker, a former longtime Bank of America executive with a Rutgers M.B.A. who, along with his business partner and brother-in-law, Ashok Kapur, was granted government permission four years ago to start a private bank, which they called Yes Bank. In the United States, Yes Bank is the kind of name a go-go banker might give to, say, a high-flying mortgage lender in the middle of a bubble. (You can even imagine the slogan: “Yes is part of our name!”) But Yes Bank is not exactly the Washington Mutual of India. One news release it hands out to reporters who come calling is an excerpt from a 2007 survey by The Financial Express: “#1 on Credit Quality amongst 56 Banks in India,” reads the headline.

I arrived in Mumbai three weeks after the terrorist attacks that killed 200 people — including, tragically, Yes Bank’s co-founder Mr. Kapur, who had served as the company’s nonexecutive chairman and was gunned down while having dinner at the Oberoi Hotel. (His wife and two dinner companions miraculously escaped.)

My hope in traveling to Mumbai was to learn about the current state of Indian business in the wake of both the credit crisis and the attacks. But in my first few days in this grand, sprawling, chaotic city, what I mainly heard, especially talking to bankers, was about America, not India. How could we have brought so much trouble on ourselves, and the rest of the world, by acting in such an obviously foolhardy manner? Didn’t we understand that you can’t lend money to people who lack the means to pay it back? The questions were asked with a sense of bewilderment — and an occasional hint of scorn. Like most Americans, I didn’t have any good answers. It was a bubble, I would respond with a sheepish shrug, as if that were an adequate explanation. It isn’t, of course.

“In India, we never had anything close to the subprime loan,” said Chandra Kochhar, the chief financial officer of India’s largest private bank, Icici. (A few days after I spoke to her, Ms. Kochhar was named the bank’s new chief executive, in a move that had long been anticipated.) “All lending to individuals is based on their income. That is a big difference between your banking system and ours.” She continued: “Indian banks are not levered like American banks. Capital ratios are 12 and 13 percent, instead of 7 or 8 percent. All those exotic structures like C.D.O. and securitizations are a very tiny part of our banking system. So a lot of the temptations didn’t exist.”

And when I went to see Deepak Parekh, the chief executive of HDFC, which was founded in 1977 as the country’s first specialized mortgage bank, practically the first words out of his mouth were these: “We don’t do interest-only or subprime loans. When the bubble was going on, we did not change any of our policies. We did not change any of our systems. We did not change our thought process. We never gave more money to a borrower because the value of the house had gone up. Citibank has a few home equity loans, but most banks in India don’t make those kinds of loans. Our nonperforming loans are less than 1 percent.”


Anonymous said...

"In India, we never had anything close to the subprime loan…. Our nonperforming loans are less than 1 percent”

….Yes they disbursed FUTURE subprime loans"..

Vik has already posted the news about how the Banks in Bangalore are repossessing the homes from the IT professionals. There has been case of a debtor (once again IT/BPO guy) in every ten cases defaulting on home loan. Banks are seeking Police protection while confiscating the assets from the Real Estate agents ( “Guntha Mantri”).

Also what about the loans made to non-residential sector? The mall rentals are decreasing and the shop owners are worried about the significant drop in the foot-prints. With the decrease in the salary ( fixed & variable components) and "VOLUTORTY ATTRITION" on rise, the prime loans are steadily but surely are converting into subprime loans.

Crooked banks (who have robbed stealthily the honest and hard working professionals off their hard earned money) stop being in denial mode….

Anonymous said...

NYT reporting on India is generally cursory and they only then to go to the famous people. I read the article it clearly stands out that Chiddu is nicely undoing all the controls former RBI Governer YV Reddy has put in place to pop the real estate bubble. Whats worst is Chiddu is forcing many of the safe PSU banks to on path of bankruptcy....wait and see. Some comments to that article are pertinent. Do read.

Also Rediff published this howler of an article from Business Standard:

Its such terrible reporting and as if written by a Real Estate Developer that the comment backlash is astounding. Worth a read only for the comments to this shitty article....

Anonymous said...

One important point that is ignored in the article is the role of black money in India. This unaccounted money is huge in real estate transactions. Ironically, this unaccounted money in real estate has saved the banking system to some extent (since home owner equity is quiet high).

Anonymous said...

chanda khachchar should be slapped and reminded that only difference between icici/hdfc loan & subprime loan is that pesky IT coolie/BPO callworkers jobs at the mercy of the badly hit US economy (financial sector is the largest customer)
Once jobs are gone & no govt welfare in place (that can't be where 80% of folks earn less than $2/day), these loans will metamorphose into indian subprime..

Chanda o chanda...

Anonymous said...


Anonymous said...

"The money the developers will raise from the initial sales will then be used to complete existing under-construction projects."

One more Ponzi scheme is in the making. It is just a matter of time before the whole pyramid collapses. New home buyers please be cautious about being lured into 10-20 % price correction.

Sri said...

Hello Vik,
Please refer to the link in DNA, Cracks in realty lobby as prices are slashed by 15-30%


Anonymous said...

Major layoffs are coming in India and US at the end of first quarter and second quarter of 2009.

Most job losses in India would be in IT companies, Private banks, the big 4 consulting companies-KPMG, Deloitte, E&Y etc. (actually that's where most high paid fools are) and all sectors related to RE like appraisers, loan folks and a lot of realtors would be out of job for almost a decade.

In this scenario, nothing should sell even if interest rates go down further as banks will not easily loan money and people need to save their jobs/some savings before gambling on housing.

By mid-year 2009, major bleeding will occur both in India and in US. US prices will fall further by 20-30% after taking a 30% drop in 2008 alone. India had more speculation and would be a deadly slowdown and an eventual crash in prices over time.

I'm glad all the high paid idiots in private sector/MNCs in India would soon realize their true worth.

Anonymous said...

Cracks in realty lobby as prices are slashed by 15-30%
Rajshri Mehta
Tuesday, December 23, 2008 04:01

MUMBAI: The reality is finally dawning. After months of steadfastly offering minor freebies to boost dwindling property sales, developers in Mumbai and Thane are cutting rates by as much as 15-30%, if not more.

Over the last weekend, Kalpataru Constructions slashed property rates by almost 23-28% in their Siddhachal residential project at Pokharan Road No 2 in Thane. Instead of the earlier asking price of Rs 5,500 per sq ft, the developer is now quoting Rs 4,250 per sq ft for Siddhachal 3A and Rs 4,000 per sq ft for 3B. The two buildings are scheduled for completion in March, 2009, and June, 2010, respectively. “We will cut rates in projects where it is possible,’’ says M Munot, chairman of Kalpataru Constructions.

Hiranandani Constructions is selling flats in its Elysium project on Ghodbunder Road in Thane at Rs 5,100 a sq ft. Elysium is located roughly 2 km away from Hiranandani Estate on Ghodbunder Road and about 5 km away from Hiranandani Meadows on Pokharan Road No 2, where the developer is offering a 10% discount on the quoted rate of Rs 6,100 per sq ft across the counter. Acknowledging the discount, Niranjan Hiranandani, managing director of Hiranandani Constructions, said: ``It does not make a difference whether I offer a discount or reduce rates by 10%. The benefit is the same.’’

A senior banker however, said that the Hiranandanis were offering even 15% cuts on the quoted rate at Meadows and Estate. “While the sales office at Thane has the right to give a discount of upto 12.36%, flat buyers have to negotiate with senior sales officials sitting in the corporate office at Powai to avail themselves of another 2.5% discount. The developer has sold about 10 flats at the 15% discounted rate,’’ the banker said.

Hiranandani is quoting Rs 5,100 per sq ft for its Elysium project on Ghodbunder Road, which is scheduled for completion in 2011.

Property experts say that other well-known developers are also set to follow suit.

Though Vikas Oberoi of Oberoi Constructions denied having slashed rates by Rs 1,500 per sq ft at his Oberoi Woods project (from levels above Rs 10,000 per sq ft) at Goregaon, he acknowledged he was considering a price correction. ``I haven’t sold any flats here. Obviously, some introspection is required,’’ says Oberoi.

The story is the same elsewhere. Ekta Shelters has reportedly cut rates by almost 15% in all its projects, including Lake Homes at Powai, and Ekta Terraces and Ekta Meadows at Kandivli, where rates were earlier above Rs 7,000 a sq ft.

A spokesman for Sunil Mantri Realtors said it was open to negotiations on the quoted rate of Rs 5,500 a sq ft for flats at Mantri Park in Goregaon. Rashmi Housing, which has also launched a project in Dubai, is offering a 30% cut from its launch price of Rs 2,900 per sq ft for a flat in its integrated township project at Virar.

At Orbit Haven on Napean Sea Road, Orbit Constructions is building 2,500-2,700 sq ft apartments instead of 4,500-5,000 sq ft ones. The rates have been cut to Rs 45,000 from the earlier Rs 55,000 a sq ft. Another building, Orbit Grande at Lower Parel, is priced at Rs 12,000-18000 a sq ft, down from Rs 17,000-22,000 a sq ft.

The rate cuts for under-construction residential projects across the city are in addition to the 15% discounts offered by developers in existing projects. Nevertheless, property brokers say that there is more to come.

“This cut is still not adequate. The market sentiment is negative. The job scenario is uncertain. As a result, affordability has gone down. Rates will have to fall by another 10-20 % as consumers believe the rates are still high,’’ says Mahesh Ahuja, property consultant, Dreamz Homes.

Sanjay Goyal, chief operating officer of Liases Foras, a real estate rating and research agency, says that developers are also launching projects at new prices that are almost 20% lower than existing rates. This confirms that the market is on a correction course.

``The money the developers will raise from the initial sales will then be used to complete existing under-construction projects,’’ adds Goyal.

Given the shrinking affordability factor, many developers are downsizing their flat offerings to bring them within budget. The Runwal group, which was earlier planning a complex of 2.53 BHK flats in Thane (W), cut the sizes down to 1-1.5-2 BHK at Runwal Estates, a residential project of 15 towers at Thane’s Ghodbunder Road.

Originally planned for sale at Rs 4,500 a sq ft, the downsized flats are going for a downscale price of about Rs 3,200 a sq ft. This works out to about Rs 17 lakh for a 1-BHK and Rs 26 lakh for a 2-BHK. The company claims to have already sold 210 flats at this price.

Similarly, Akruti City has launched a new project on Pokharan Road No 2 for approximately Rs 3,800 per sq ft. At the last property downturn, Akruti had done the same thing and had constructed smaller flats of about 450 sq ft in Andheri (E).

Anonymous said... lodha luxaria in thane , can anyone verify that this project is real & all amenities are true to quote?

Observer said...

Looks like IT/BPO companies are moving out of the metros due to escalating costs. Just for fun, I tried to book office space in Bangalore and Chennai for a start-up recently. I was quoted approximately Rs. 28,000/month for a small office (8x12) including maintenance in an office complex close to central Chennai.

For comparison, in Houston, one can get a similar office space for approximately $750/month, which is only slightly above the space in Chennai. Now compare the facilities/infrastructure level between the two cities. I picked Houston and Chennai because both are large metros with 4-5 million population. Even in Boston, which is one of the most expensive places in the US, an office space costs $900/month in Cambridge next to MIT and Harvard.

I felt like laughing when the lady quoted Rs 28,000 for the place. I really think these people have not been to the US, and done a basic comparison. In most instances I have found that in India, prices are very high, but quality is low.

NEW DELHI: IT services firm MphasiS has asked all 1,300-1,500 employees at its Noida office
to either move to a low-cost location or quit. Most
of the employees have quit or are in the process of quitting the firm. Only a few have decided to shift to another centre, informed four former employees who quit recently.

MphasiS, majority-owned by EDS that was acquired by HP this year, offers outsourcing services in financial services, healthcare, communications, transportation, consumer & retail industries and has over 28,000 people on its rolls. It set up the Noida centre in 2005 for BPO operations and has over 1,000 BPO employees, besides some IT employees.

The four former MphasiS employees ET spoke to said the company had told the BPO employees about three months ago to decide between quitting or relocating to other MphasiS centres such as Indore and Vadodara. All employees were given time till December-end to decide and were not given any reason behind the move.

Anonymous said...

Whyyour home loan rates refuse to go down! You have been bamboozled !

Following are few of the key points from the article

Surprisingly, in the hardening interest rate regime, each and every hike in CRR, repo and other key rates was immediately followed by a corresponding increase in the lending rates. But the existing customers of a large section of banks and HFCs - mostly private - are yet to benefit from the rate cuts. That too when following a series of fiscal measures, CRR and repo rates have now been brought down to 5.5% and 6.5%, respectively, from their peak of 9% some time back. This means that they are only 1% and .5% higher from their respective levels in 2004 when floating home loan rates were at their all-time low of 7-7.5%.

Banks have started reducing the interest rates following the economic stimulus package announced by the government and cut in policy rates by the RBI. However, the fall in lending rates are not as significant as cut in policy rates due to a very uncertain economic scenario.

First, if the cost of funds for banks and HFCs are still high and as a result, they are unable to slash their lending rates, then how come are they giving loans to new borrowers at 3 to 5% lower rates than those being charged from their existing borrowers? Also, while every upward revision in key RBI rates (mainly CRR and repo rates) earlier used to be immediately followed by a corresponding hike in lending rates - both to new as well as old borrowers, banks seem to be looking in a different direction as interest rates begin to soften

Lame Duck RBI response “Ideally, banks should pass on the benefit transferred by the RBI to customers, but we can’t force banks to cut rates.”

It is better not to take anything for granted and better still pray for some 'miracle' to take place

Anonymous said...

@Anonymous at 4:47
Based on your data, I see that the current "low interest" schemes are similar to Pozi schemes, where newer buyers are enticed to take on new loans to benefit the builder lobby at the cost of the existing borrowers. This means that though the existing borrowers are no cross subsidising newer borrowers!
Cui Bono? The builder lobby. NOT the newer batch of "investors".
Hence, for buyers about to buy a house-Caveat emptor! Very soon you may be subsidising the next batch of suckers (as all banks have stated that the low interest rates will be applicable for 5 years only even if tenure of loan may be 15 years).

Anonymous said...

Slowdown? Home loans grow 20-25%

SundayET spoke to a cross-section of bankers and came out with the conclusion that the home loan segment is quite robust. During the last three months, the segment has witnessed an average growth of 20-25%, largely due to small-ticket buying.


Anonymous said...

While I respect opinions made here, there are some things that people should understand:

- All asset bubbles are created or nurtured by the govt to dilute or dispose off public debt.
- The biggest beneficiary of any asset bubble is usually the govt (it can dispose off useless land for exhorbitant sums that can fund its pet projects)
- Debt bubble popping hurts govt more than public. That is why you see all public & bank officials working furiously to keep debt bubble going.
- Ordinary public (middle 60%) will pay to top 10% one way or the other (inflation or taxes).
- India got used to debt bubble only in 21st century probably because both PM & FM are nurtured in USA that got used to debt bubble.

Nonetheless, US got its debt bubble funded by Europe & Asia. US is the only country that got free ride off of the rest of the world. US is one that does what benefits USA. I am proud of being a US citizen and thanks to citizens of every other country for having supported such high standard of living for us. Keep buying all of our worthless debt at face value. We really appreciate it.

Anonymous said...

Thanks Abdullah to bring it to our notice, we really appreciate it. Following is the data about bank’s growth & average loan size from the TOI advertorial.

ING Vysya Bank(40%) - 20-25 lakh.
LIC Housing Finance(33%) --Rs 10.6 lakh to Rs 13 lakh
Dewan Housing Finance(17%) --Rs 6 lakh

So based on above data what are the average prices of apartment?
 20% buyer’s equity. Max-31 lakh Min-7.5 lakh
 30% buyer’s equity. Max-35.6 lakh Min-8.6 lakh
 40% buyer’s equity. Max-41 lakh Min-10 lakh

This data reveals that the prices has gone down, every one know that the average price was 60 lakh in 2007 Dec for 3bhk house.

As promised every day low prices.
Guys let it fall then only pick up, minimum 50% price cut is guaranty.

Hey Abdullah, why you left the black business & started looking at the white business?


Anonymous said...

The CRISIL is really notorious, as soon as they came to know about
ING Vysya Bank has made 40% growth in home loan they downgraded the banks rating to negative.

Two months before CRISIL down graded ICICI bank. Now Khachchar should demand CBI probe into matter as CRISIL downgraded it despite banks healthy lending practices.


Observer said...

Vulture, you are hilarious. Good reply to Abdullah. Wonder how long Abdullah, Bindaas Bhai, Realty Rider, The Boss, Ashish and others will continue their forlorn attempts to prop up the market.

I foresee the same result as what happened in the 1984-86 crash, the 1996-1998 crash, and now the 2008-2010 crash. Every ten years or so, investors buy into the hype and because of the opaque real estate markets, drive up prices to absurd levels, with no relation to the underlying income.

When investors stop selling and buying from each other, they realize the end user, the average middle class man can never afford those apartments, and the decline begins. No amount of spinning the data can hide this simple fact. Prices will be down at least 40% from the peak like in the previous two crashes in real estate in India.

Anonymous said...

Unitech lays off 10% of workforce

"Reeling under slowdown and heavy credit crunch, the realty players have recently either cut jobs or slashed employees’ salaries.....Earlier in this month, Parsvnath had cut salaries of its employees in top and middle level management by up to 20%, while Omaxe had fired 70 employees and lowered the remuneration by 10%. "

Anonymous said...

IT companies exhort employees- Please take leave.

"IT companies want employees to use up pending leave, but don’t mistake this for an act of generosity. The motive is different. The more leave employees take, the less companies have to pay towards leave encashment at the end of the year."

Normally, IT employees time their vacations with those of their customers. But this time it’s more than just that, said an insider. “Companies are using any reason to implement forced vacations, including using it as an HR initiative to get employees to spend more time with families. [But] it is only a tactic to prune costs,” he said.

Shailesh said...

I friend of mine is realtor for last 20 years in Thane. I met him yesterday. His honest opinion, forget buying house for next 2 years. Price cut will be 50%+ in Thane. Most realtors will not tell that in front, but since he is very close friend and has seen lots of ups & downs, he tells me the truth.

Anonymous said...

Dear Shailesh,

Great you have friends like Bejan Daruwala. Keep us all posted on his predicition.


Anonymous said...

Dear Anonymous@11:23,

Shailesh said - "friend of mine is realtor for last 20 years in Thane."

In the very first line.

You seem to think that this person living in thane and in realty business is Bejan Daruwala!!!

Don't you think that's a preposterous claim to make. I know Bejan is not in realty and definitely does not stay in Thane!!

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