Saturday, February 27, 2010

The Budget - Dr Jekyl and Mr Hyde

The Finance Minister of India seem to have mastered the fine art of writing suspense thrillers, only here we know who is to blame. Giving direct IT tax breaks and taking it back using indirect forms like service tax, excise tax, petrol tax is pulling wool over the eyes of the millions of middle class Indians. With farmers he can write off loans, with this stupid NREGA scheme he pump thousands of crores into rural India without accountability, but when it comes to the middle class he has magically suckered it into believing that he is doing them a favor.

The news media is in the cahoots of the Congress government and is unable to make unbiased assessment of the budget. The stupid corporate CEO's don't care since they know they will pass the tax to the consumer, and the stupid consumer is happy to watch Tendulkar and SRK heroics instead of seeing that he is being robbed in broad daylight.

Consumer inflation is running at 18% which will spike by another 5% due to hikes in duties and petrol. How does a 10% reduction in income taxes help you when there is a 25% increase the cost of living ? This is the most regressive budget I've seen as the money supply with the consumer will decrease due to record inflation.

And to add icing to the cake, the Finance Minister will eliminate whatever peanuts can be deducted off the taxes once he implements the uniform tax code in 2011. That will roll back the tax cuts for the middle class to zero thereby causing a 50% drop in savings over 2 years with this rampant 25% inflation Y-O-Y. For government employees who had just begun to see the benefits of the sixth pay commission, you will soon see all the extra cash vanish at a record rate thereby negating the impact of any hike.

Add to this the interest rate hikes for floating rate home loans, and we have a case where the Indian savings rate will now be competing with the Americans to see who is the lowest of the two.

In summary the Finance minister has magically created money by lowering interest rates and the sixth pay commission salary hikes and now has taken that same money away by higher taxes and record inflation. To combat inflation he will raise interest rates, thereby siphoning off more money from the borrower, however inflation wont reduce as he has increased indirect taxes on the economy. This is truly the case of the left hand not knowing what the right hand is doing, or a split personality like Dr Jekly and Mr Hyde.

On one had we have Obama fighting for the American middle class with tax cuts, increased unemployment benefit spending, curbs on foreign visas, speaking tough to China to revalue its Yuan and trying hard to get health care for a vast majority of uninsured, and on the other had we have the 3 idiots who are ready to bite the middle-class hand which has been feeding it over the past 40 years.

A finance minister is known by how well he manages inflation, interest rates and taxes. With Mr Mukerjee (Manmohan and Sonia included) this will be year which they will be remembered for and that too not very fondly.

Frustrated buyers, Why not take some Action !!!

I have read many stories on this board about House buying related issues. The main one is un-affordability. The second one is scrupulous nature of unregulated business of Builders. Third one is on Banks and Loans.
I was thinking what can be done to make any impact. Here is a simple thought,

Why not write a small petition to Prime Minister of India. On their website, there is online form to write your petition. In my opinion, once you have written it, post what you sent in Comments section. This way other can see what is being sent. lot of comments are posted, we can send link to all Newspaper editors.

Wite to PM

I posted following, Honorable Prime Minister,

I would like to point out one concern from large number of citizens. Today home prices in most urban cities in India has become totally un-affordable to most indians, even those who are well educated and contribute significantly to country's economic growth. In addition to that, buyers face lot of issues like timely delivery and quality construction with un-regulated builder lobby. Home is necessity to everyone. Please do the needful to bring necessary changes.

Please do not use Comments in this post for any other purpose.

Friday, February 26, 2010

Ripoff by Indian banks

Passing the buck, this is what banks do. I remember asking for a fixed rate loan and the bozo's didn't even know the details of their own product. Floating rate loans are the ARM mortgages of India. Interestingly in the US, most loans are 30 year in duration. In India they are betweeen 10-20 years and if one looks at the interest payments for the loan at high interest rates, the amounts are staggering. Indian banks have suckered people into these products and soon borrowers will be paying 10-20 extra EMI's. With 50k on average, a nice 5-10L extra for the banks. If a 48 year old Chartered Accountant is running into these problems, what about lesser educated folks in the finance field

Livemint reports.

In the ocean of disagreement about India’s economic indicators—gross domestic product growth, inflation, share prices—there is an island of consensus: the direction of interest rates. “Going up” are the words on everyone’s lips. The governor of the Reserve Bank of India pithily stated: “The direction of policy is clear—we had to ease at the time of the crisis, we have to tighten now.”

While the average Indian will get indirectly affected in many ways by rising interest rates, there is one area where the impact will be direct. And severe. This is in home loans.

I asked one of my senior colleagues, Francis D’souza (name changed), about the home loan that he had taken from a respected private sector institution (Francis is a chartered accountant, all the more surprising!).

“What was the kind of home loan product that you took?” I asked.

“Well, they only had one standard product, a floating-rate loan that was priced off their PLR (prime lending rate). The choice of tenor was flexible—I took a 10-year loan, since I am already 48 years old.”

“So you got a your credit score, which resulted in a discount to their PLR, and this EMI (equated monthly instalment) was for 120 months?” I asked.

“Yes, that’s right.”

“And what happens now, if interest rates go up? How do you get to know, and what impact will it have on your EMI?”

“The loan document said that the PLR gets adjusted every quarter, and it’s apparently on their website, but frankly, I don’t get any communication on it at all. But yes, if the rates go up, I will be affected—the EMI will remain the same, but I will have to pay more than 120 instalments, maybe 130 or so, depending on many factors that I don’t understand.”

“When you took the loan, was there any discussion about this exposure? And also, did you have any alternative—say, a fixed-rate home loan—that was discussed with you?”

“No, the floating-rate loan was their only product, and no, there was no discussion about the exposure that I had to moving interest rates.” He paused, and added, laughing nervously, “Frankly, I don’t look at the statements, we just hope that we will be done in 120 months!”

Francis’ situation is similar to hundreds of thousands of Indians who have taken out floating-rate home loans over the past several years. The home mortgage business today is around Rs2 trillion, growing at 35-40% a year, according to data from the National Housing Bank. Precise data on fixed/floating mix is not available, but Adhil Shetty of tells me that “over 90% of it will be floating-rate-based. Banks don’t market fixed-rate products, and sales people are generally trained to sell floating-rate home loans”.

A detailed check of the market suggests that most banks offer only floating-rate home loans, and a few offer hybrid fixed products. There are no pure fixed- rate loans—one large public sector bank offers a fixed-rate loan for 20 years, but it resets after five years.

Many market observers have written about how India’s mortgage market is unfair to customers. But these debates have invariably been about one particular issue—that of the arbitrary and subjective nature of PLR setting by each individual bank.

However, the fixed versus floating exposure issue has received little attention. Some argue that this is because there is no demand for fixed-rate mortgages—customers invariably choose to pay a few per cent less for floating-rate loans.

But this issue cannot be dismissed as one of informed choice and caveat emptor. There are two critical aspects that need attention: One, the deeper systemic issue underlying the absence of fixed-rate home loans; and two, the issue of consumer rights and financial literacy.

Current market practice clearly proves that banks have no incentive to sell fixed-rate home loans. But they don’t do this because there is no deep long-maturity debt market in India that allows banks to offset their duration exposure. Essentially, the banking system has no way to offset the risk of long-dated assets on their balance sheet.

The solution? Pass on this risk to the customer. In essence, what a sophisticated banking industry cannot manage is now being handed off to the man on the street. There’s something wrong here. In the medium term, the answer will clearly come from a deepening capital market, one that can absorb longer dated assets such as home loans.

This brings us to the second point—while deeper markets and so on will take time, banking practice needs to change right away: to educate customers about the implications of their choices, and the extent of the exposure. EMI calculators can easily have “what-if” scenarios going out over the life of the loan.

In the meantime, my message to Francis was: “Please get in touch with your loan officer and understand your exposure. Don’t rest on the hope that ‘all is well’.”

Tuesday, February 23, 2010

Telangana stir worsens outlook for realty sector in Hyderabad

Where are all the morons who said that the Satyam/Maytas fiasco and now the Telangana agitation will have no impact on business and residential real estate ? 100 storey buildings in a city where land is abundant was the signal that Dubai and Hyderabad are no different when it comes to greed.

Hyderabad: Dotted with the sprawling campuses of information technology (IT) firms such as Microsoft Corp. and Wipro Ltd, Hyderabad’s fast-moving growth corridor—the Gachibowli area—looks skeletal with half-done buildings, yellow construction cranes and giant billboards that promise delivery of homes on time.

Skeletal buildings: One of the many incomplete realty projects in Hyderabad’s Gachibowli area. Bangalore is gaining from Hyderabad’s loss. Many real estate investors consider the Karnataka capital a safer bet. Madhurima Nandy / Mint

Hyderabad was hailed some years ago as one of India’s hottest property destinations, with firms such as US-based Tishman Speyer Properties and Malaysia’s Sunway City Bhd coming in to launch their maiden projects in the country.

In its present condition, Andhra Pradesh’s capital city remains the lone realty victim of the slowdown.

“Other cities are already on the recovery route. But Hyderabad has been in the news for all the wrong reasons,” said George Johnson, city head (firm management), Jones Lang LaSalle Meghraj, a property advisory.

The downturn perhaps shook Hyderabad more than it did other large cities due to certain disturbing events.

The first was the unravelling of a multi-crore accounting fraud at Hyderabad-headquartered Satyam Computer Services Ltd last January, followed by the death of chief minister Y.S. Rajasekhara Reddy in a helicopter crash in September.

And just as the sector was beginning to recover, the struggle for a separate Telangana state that includes Hyderabad, intensified.

“Whether the market bounces back depends on if they can control the Telangana agitation,” said N.R. Aluri, managing director, NCC Urban Infrastructure Ltd. “The residential segment particularly looks uncertain though we are expecting some demand in the budget category.”

City-based NCC Urban, a subsidiary of Nagarjuna Construction Co. Ltd, has moved its focus to Bangalore, where it is building four projects, compared with one in Hyderabad.