Restructuring of loans – Sub prime crisis brewing in India?

Keeping in view of the bank’s margins which are under pressure due to the global economic slowdown, the Reserve Bank of India has provided the banks a breather by revising the method of calculating the current value of restructured loans. The RBI has been decided to modify the formula for computing diminution in the fair value of restructured loan. Diminution means the reduction in the value of loans that have come for restructuring, due to reduction in interest rate or rescheduling of repayment of principal.

At present, while restructuring the loans, banks take into account the benchmark lending rate, Prime Lending Rate, which have been on a rise during the last few years, the RBI said. It is adding to the financial difficulties being faced by banks due to the current downturn. The RBI further said that in the annual balance sheets for the year ending March 2009, the banks will also have to disclose the amount and number of accounts in respect of which applications for restructuring are under way.

Indian banks have restructured Rs.40,304 Cr loans in year to March 31, 2009. This figure is going to rise since State Bank of India (SBI), a biggest lender is yet to come out with its figures. As of now, Axis bank is topping the list with the restrucutured loan of Rs.9961.7 Cr. Under restructural scheme, the banks, depending on the genuineness of the borrower may either give the borrower additional time for repayment or EMI holiday for a while instead of declaring the borrower as defaulter.

More and more applications are coming for restructuring the loans. But, if the economic situation doesn’t improve, and with more and more job loses, the borrowers may not be in a position to pay-back even under restrucutured loan scheme. In housing sector, with the real estate rates falling by 40-50% in urban areas, inventory valuations also will also dip drastically and a sub prime crisis may soon develop in India.

Global Investors started investing in India

Indian stock markets have partially recovered over the last few sessions of trading. The Sensex has gained over 3200 points since the beginning of the rally. Economists with leading financial institutions also say that the slump period is over and “green shoots” of recovery are sighted. The turning point in the industrial production cycle is expected by mid 2009.

Sensing the change in the economic scenario in India as compared to dismal performance in other countries, global investors have started investing again in a big way. Over Rs.500 Cr was the inflow in the week ended April 22. Since March 9, FIIs have invested Rs.8000 Cr in the Indian markets. Without any significant growth in industrial/agricultural sector, any upward movement of the Sensex is purely speculative and un-sustainable.

Now, the point to be seen is whether the markets can sustain these during and after the elections? What sort of reactions the markets will show for the new coalition (kichdi) government at the centre? What will be extent of long-term effects of the recession in USA in India?

Good move by the market regulator

Indian stock market regulator, SEBI has amended listing agreement to bring-in greater transparency in reporting by ensuring uniformity in declaring dividends. Dividends will now be on per-share basis and not on percentage basis. This will remove the confusion of the investors regarding the actual return on their investments since the face value of the shares are not uniform. It may one or two rupee, 10 rupee or a hundred rupee.

Per-share dividend declaration will make more sense in Indian markets.

RIL was down-guarded by market analysts

Reliance Industries Limited was down graded by BNP Paribas and Citigroup Global markets Inc – from buy to hold and from hold to reduce. The gain of over 40% in the share prices is not justified by the performance of the company. The increase may be due to the sudden liquidity rush in Indian markets. The RIL plans to spend about US$4.5 billion on projects this fiscal. The recession world-wide cut demand for fuels and the fourth-quarter net profit fell 9.2% to US$709 million.

Under the circumstances, whether it is justified to merge RPL with RIL in the ratio of 1:16? The shareholders are fooled/confused by these “merger-de-merger” techniques of Ambanis.

Uniformity in tariff structures, and security in Indian ports

It is a good move by the Indian government to all the port under Tariff Authority for Major Ports (TAMP) as a Regulator in addition to fixing tariffs for major ports. Over the last three to four years, shipping industry and port traffic has grown considerably and major ports currently handle 75% of the total trade in the India. There are also private ports and non-major ports which contribute to about 25% of the port traffic.

India has 12 major Centre-run ports and 183 State-run and private ports. Tariff structure in government-run and privately run ports is different and the competition due to this is helping the smaller state-run and private players. Hence, there is bound to be opposition for this regulatory move.

However, it is necessary that all the ports, major, non-major and private ports should be brought under government regulation so as to have uniformity or transparent differences in the tariff structures. This also will ensure that the necessary safety and security requirements are met in all the ports.

Monetisation to bankroll deficit – India following USA?

Practice of printing notes, though in vogue for long time, is being practiced by Indian Government and may soon end up in a situation similar to USA. As per the good governance practice, any printing of notes should be backed by the stock of gold/silver in the government treasury. USA is paying a heavy price today for printing dollars to pay for the Iraq war expenditure.

As per the reports appearing in the press, Indian security presses have printed notes worth over Rs. 1.5 lakh Crore. In addition to this the government has borrowed over Rs. 2,61,972 Crore from market and thousands of Crore of rupees were tapped as advances from various sources. All these funds went to meet expensive election gimmicks such as Farm loan waiver, implementation of 6th Pay Commission recommendations, National Rural Employment Guarantee, election expenses and other government subsidies to various sectors.

India government is heading for a financial bankruptcy similar to Pakistan, and what sort of “Khajana” or Treasury will be handed over to any non-Congress government, if formed after the elections? ALL EMPTY!