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Tuesday, April 15, 2008

Infy holds steady despite US jitters, net zips past $1 b

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Infy holds steady despite US jitters, net zips past $1 b

Co Sees Slower Growth In First Two Quarters

THE trendsetter for the Indian IT services industry — Infosys Technologies — has put its trademark caution up front on its future earnings growth. The company said
that it expected sales to rise between 19.2% and 21.1% in 2008-09, with slower growth seen in
the first two quarters amid a slowdown in the US.
    "Short-term growth will be slower but for medium-tolong-term, there are significant
opportunities," CEO S Gopalakrishnan said after India's second-largest IT services exporter reported a 20.1% rise in consolidated revenues to Rs 16,692 crore for FY08. Net profit was Rs 4,659 crore, rising 20.8%.
    Infosys has now managed to generate a net profit of $1 billion on a revenue of $4 billion. Its
cash and cash equivalent reserves now stand at Rs 9,600 crore. As a bonanza for its shareholders, it has recommended a total dividend of Rs 33.25 per share, including a Rs 20 per share special dividend for the profit milestone. The outgo, because of the dividend payout, will be Rs 1,902 crore.
    Infosys said that a survey of its top 100 clients
on their IT budgets for 2008 revealed that 76% of them are either showing flat or marginal decline. "There is a tightness in their spending and decision-making cycles are getting longer," COO SD Shibulal said. The company also saw sporadic cancellation of projects, but termed it as nothing significant as it has around 5,000 ongoing projects at any given time. For the quarter ending June 2008, the company has projected income of Rs 4,570-Rs 4,582 crore, a year-on-year rise of 21.1% to 21.4%. Hiring plans show Infy model is robust
    HOWEVER, despite its current size of Rs 16,692 crore and expecting to touch Rs 20,214 crore for FY09, Infosys sees operating margins at almost the current level of around 32%.
    CFO V Balakrishnan said the operating margin is expected to move in a narrow range. This would be significant, given the size of the company and the fact that Infosys' margins are one of the best in the industry.
    Though the revenue outlook for the first quarter remains flat, Infosys has stepped up its hiring numbers. For FY09, it is expecting to hire 25,000 people on a gross basis, which is actually higher than its current revenue growth rate, showing the robustness of its business model.
    However, there have been some painpoints, notably the contribution from its largest business vertical —
banking, financial services and insurance — which has come down by 1.7%. The contribution to revenue from its largest client is inching closer to 10%, touching 9.1% for FY08.
    Mr Gopalakrishnan said that BFSI is one of the largest verticals in terms of spending on IT and expects the strong growth to continue as the industry is very resilient.
    At the same time, it is also chasing a few deals in the range of $100-$200 million, though the gestation period for this is expected to be 6-9 months.
    Infosys is also expecting to add newer service lines and newer geographies as means of reducing its dependence on North America.
    For FY08, the revenue contribution from North America stood at 62%, showing a 1.3% drop compared to FY07 while the contribution from Europe increased by 1.7% to touch 28.1%.



Bulls run the high five

Bulls run the high five; MFs rake it in

MF Manager Bloc Hits Higher Returns Than Bulge-Bracket FIIs

THE coming week has special significance for cricket buffs and marketmen. While it marks the beginning of the muchawaited India Premier League cricket series, the week will also witness the completion of five years of a bull run on Indian stock exchanges.
    In April 2003, the Sensex crept to below-3,000 levels (hitting rockbottom) as Infosys halved its earnings' growth guidance. The backlash from the US due to a loss of jobs had raised concerns about the future of its IT business. While Infosys' and analysts fears proved to be unfounded, that was the year the great Indian bull run began.

    It all began, according to experts, around the third week of April 2003 — when the Sensex hovered around sub-3,000 levels. Since then, the Indian equity market (benchmarked on the Sensex) has multiplied five times in just five years , placing it in the league of the world's best
performing equity markets. Only four other countries — Russia, Brazil, Indonesia and Mexico — have managed to achieve this.
    While the near-25% correction since the beginning of this year raises questions on sustained buoyancy of Indian shares, ET
spreads the logsheets to find answer to the mother of all questions — who made more money in this bull run?
    Mutual fund managers as a community — and not bulge-bracket FIIs — achieved higher returns. While FIIs collectively notched up an annualised return of 30% over the five-year period, it was at 34% for MFs. In arriving at this, the cumulative investment by FIIs has been considered, along with the returns generated by the MF
community. For the study, portfolios of FIIs and MFs were analysed along with their net investment figures (Sebi data) over the five-year period to calculate internal rate of returns (IRR). Mid-cap picks helped mutual funds stay ahead in the race
    "INVESTMENT strategy-wise, mutual funds adopt a bottom-up approach. Most funds, over the past few years, have been able to spot potential winners in the mid-cap and small-cap segments and invest in them," said Birla Sun Life Mutual Fund's CIO A Balasubramanian.
    In the initial years of the bull run, mid-cap indices outperformed largecap indices by a huge margin. So to that extent, outperforming the benchmark was an easy game as outperformance meant higher exposure to mid-caps. For instance, in FY04, S&P CNX Mid-cap gave a return of 140% while Nifty (large-cap index) gave only 80%. In the subsequent year (FY05), CNX Mid-cap gave a return of 31% and Nifty 12%.
In contrast, FIIs, who religiously stick to large-caps ($1 billion or above), could not benefit from the sharp mid-cap rally. "Frankly speaking, most of the action for institutional investors has been in the large-cap stocks. And with regard to FIIs, most of them hold their portfolios in wellresearched large-cap stocks," said JPMorgan CEO Krishnamurthy Vijayan. However, since 2007, trends reversed in favour of large-caps catching many fund managers on the wrong foot. And if the recent trend of mid-caps underperforming large-caps were to continue, then the equation would change in favour of FIIs.
    While the returns have been in favour of MFs, the money invested by MFs was less than that invested by FIIs during the considered period. FIIs, for instance, invested Rs 2,09,213 crore in the stock market on a net basis over the 5-year period as compared to Rs 38,964 crore by MFs. FIIs' portfolio for listed stocks — as per CMIE data — grew from Rs 54,670 crore to Rs 6,95,123 crore.
For MFs, the portfolio grew from Rs 23,085 crore as on March 2003 to Rs 1,69,022 crore as on March 2008.
    Making money in this bull run was not a cakewalk for investors. Over 50% of listed stocks gave lesser returns than the Sensex during the considered period. So, if the Sensex returns were raised as benchmark, there was actually a 50% probability of picking up an underperformer. At the same time, it is interesting to note that more than 80% of equity funds (weighted by assets) managed to outperform the Sensex in terms of returns.




Monday, April 14, 2008

With markets at bottom, valuations are appealing’

With the global liquidity crisis casting a long shadow, the Indian stock markets have become range bound at the 15,000-16,000 level. However, GDP growth for 2007-08 is expected to remain intact at 7.5-8 per cent, and corporate profits for Sensex companies (for the year) are expected to register 21-23 per cent growth. Given such strong fundamentals, if you believe in the long-term India growth story, continue with your SIPs in mutual funds, and if investing directly, choose companies with strong fundamentals and attractive business potential, urges Aseem Dhru, chief executive officer, HDFC Securities, in this interview to our correspondent.

Tell us about us about the current state of the market. How do you see things unfolding from here under the influence of global factors?
The world is now a large global village. The positives of this in terms of opportunities and efficiency cannot be disputed. The flip side is that all financial markets in the world are now coupled together. If there is any factor affecting one market, the tremors are felt by all the others. The total equity of all the US firms put together is to the tune of $400-450 billion. The subprime crisis is threatening to wipe off the entire equity of the US financial market. Global banks have become wary of lending to each other for lack of trust. So global markets are today facing a liquidity crisis and a crisis of confidence. Things have come to such a pass that large organisations have stopped getting capital from sovereign wealth funds. Real estate prices have moved down into uncertain territory in the US.
As for the Indian stock markets, foreign institutional investors (FIIs) are not coming into the market right now as they are fearful. It is not that they are pulling out of India, but they are not investing. And that has led to a fall in the market. Their fear is now overruling the market. So we have moved from an over-exuberant market to a cautious one. It seems as though all of a sudden there are no positives left in the market, which is not true.

Why has the market become range bound between 15,000 and 6,000?
When the subprime crisis broke out in July 2007 the Indian market was trading at around 16,000. At that time this figure looked very good as the market had risen from 14,000 in March. After that the market went up rather irrationally from 16,000 to 21,000. And now it is back to that same 16,000 level. This is a very attractive level—a level that reflects its fundamentals. I don't see a huge downfall from this level as the market is very compelling at this level.

So you think that the market is fairly valued at this level and there is very little chance, as you said, of it falling further from here?
While it's very tough to predict the exact fall, what I think is that in the current scenario the markets are very compelling. India has a GDP growth of 7.5 to 8 per cent, which compares very favourably with the half or one per cent GDP growth rate in developed countries. This suggests that money must return to India. It will be business as usual, but people will move away from the excesses of the past. The markets are at the bottom and valuations are attractive.

You expect GDP to grow at 7.5-8 per cent for 2008-09. Why such a moderate figure?
Yes, that growth rate looks quite certain. Every time we see India's GDP growth rate move above 8 per cent the economy overheats. Infrastructure growth in India has not kept pace and prepared the ground for GDP to grow at a level higher that this. Capital goods companies have their order books full. It is the limited ability to execute these orders that is pulling growth down. So, for now I think a GDP growth rate between 7.5-8 per cent is realistic.

In such a scenario, at what rate do you expect corporate profits to grow?
I see corporate profit for the Sensex companies growing between 21-23 per cent for the year 2007-08, and EPS growth at between 13-15 per cent. I think profit growth is not going to change dramatically in this quarter. Apart from some sectors, where I see a slight dip in performance, I think corporate growth should be what it was in quarter three. There is no major threat to corporate results. We have seen some heady growth in the past because of which the base has grown. So companies will find it difficult to sustain the growth rate of the recent past. There is no major problem in quarter four, and fundamentally there is nothing wrong with the economy. It is only that in the current market perceptions are weak. Whatever results come out, they are unlikely to upset the markets. What the market needs now is restoration of confidence.

Which sector do you think will be under pressure?
Real estate prices needs to correct. There is still some pain left in the real estate sector. Unless real estate prices go down to more realistic levels, the economy can't grow at a healthy pace. At these prices companies can't rent or buy properties and yet conduct business profitably. So real estate prices need to correct.

What major challenges do you see for Indian manufacturers in the near future?
The biggest challenge is that money has become expensive. In the current market tapping equity has become difficult, so companies will have to rely more on debt. That will put pressure on interest rates, which could move up. Manufacturing companies will also have to deal with higher input prices. In addition, a slight slowdown in consumer demand will also impact companies. So the manufacturing sector, which has seen a lot of growth during the past couple of years, will be under some pressure.

What should investors do in such a scenario?
For retail investors the mutual fund SIP (systematic investment plan) is the best way to invest. In the current market scenario investors should look to increase their investment in these asset classes rather than get out of them. I think that the India story is intact. Fundamentally and structurally there is nothing wrong. Investors who are looking to invest directly in equities should look for companies that are fundamentally sound and have strong business potential.


Fresh move in $3b Tata investment plan

Govr, Tata agree to resume dialogue


The government and Tata have agreed to restart talks over the Indian conglomerate's stalled US$3 billion, power, steel and fertilizer investment proposal.

The move is a response to a letter from Tata to the finance adviser in which Tata asked for a resumption of talks that have been on ice since August 2006.

In 2005 the Tata Group initially proposed setting up a 1,000MW power plant, a steel mill with an annual production capacity of 420,000 tonne and a one million tonne capacity fertilizer unit in Bangladesh.

Following the letter, the finance ministry instructed the Board of Investment (BoI) to invite Tata's representatives for fresh dialogue.

“We received a letter from the Tata Group in the middle of February where they sought a fresh dialogue to settle the multi billion dollar investment proposal. Following the letter the ministry, after consulting with the government policy makers, decided to resume the dialogue,” a high official of the Finance Ministry said, preferring anonymity.

He said the government wants to wrap up the dialogue and settle the investment deal before December 2008.

Following the letter a low profile meeting was held last week between a representative from Tata and the BoI chairman Kamal Uddin Ahmed. The meeting is a precondition to more extensive and high level contacts between Tata and the government, sources said.

“A representative from Tata's Bangladesh office met with the BoI chairman to settle the date, venue and agenda of the proposed meeting,” a high official of BoI said.

Yesterday Kamal Uddin Ahmed refused to comment.

Tata representative Mohammad Reaz said they had received a letter from the BoI where the agency invited them to launch fresh dialogue.

Although the negotiations reached stalemate in 2006 significant progress had been made. Both sides provisionally agreed on a 15-year guarantee of 1.25 trillion cubic feet (TCF) gas and around 3 million tonnes of coal supply to Tata annually and upgrading of gas pipeline from the current 24-inch diameter to 30-inch diameter. The Asian Development Bank (ADB) agreed to provide financial support for development of the gas pipeline.

During the year long series of negotiations it was also agreed to allow Tata a 10-year tax holiday facility, and guarantee uninterrupted gas supply. The two sides then agreed on awarding of a coal mine for exploring around 3 million tons of coal a year to Tata in the middle of Phulbari and Barapukuria coal fields. However the decisions were never approved at ministry level.

The previous BNP-led government was unwilling to make a decision before the scheduled general election, while the present caretaker government has said it has other priorities.

In the meantime, Tata has launched major investment projects in other parts of the world.

During the period from April 2006 to today Tata Group bought the largest steel maker in Europe 'Corus' at a cost of around US$ 13 billion along with a soda ash plant in the US at a cost of $ 1 billion.

The group also invested for the production of a 4000 mega watt power plant in India, is going ahead to invest in a steel plant in Vietnam and going to explore a coal plant in Indonesia.

Tata's country director S Manzer Hossain left the country in March. Before going he said Bangladesh has always been at the top of the group's priority list, but of late Tata had to divert its attention to some other locations.

jasim@thedailystar.net

Sunday, April 13, 2008

Betting big on India, Soros terms Ambanis' growth spectacular

NEW YORK: In their bid to outdo each other after dividing their family empire, two Ambani brothers -- Mukesh and Anil -- have created India's most spectacular growth story in the recent past, believes one of the world's most renowned investor George Soros.

Putting India on a higher trajectory than China in terms of an investment destination, the legendary investor says in his latest book that the economic growth rate has more than doubled since his visit to India in late 2006, with the rise of Ambani brothers emerging as the most spectacular one.

"The most spectacular has been the rise of the Ambani brothers. When their father (Dhirubhai Ambani), the founder of Reliance Industries, died, the brothers divided his empire among them and are now trying to outdo each other," he says.

The book, titled 'The new paradigm for financial markets: The credit crisis of 2008 and what it means', is available in electronic format and print edition would come out on May 19.

Talking about the two Ambani brothers, Soros says that the two groups are present in businesses ranging from oil refining, petrochemicals, and offshore natural gas production, to financial services and cellular telephone.

"Mukesh Ambani is using the cash flow from its oil and gas business to set up Reliance Retail, bringing food directly from the grower to the consumer," Soros notes, while terming it as a "bold project that seeks to cut the differential between consumer and producer prices by more than half".

Incidentally, Soros has invested in about half a dozen ADAG firms, but none of the Mukesh-run companies are known to have any such investments.

The investment in various ADAG firms is estimated to be worth about one billion dollar and is said to account for over half of the total for all Indian companies.

Saturday, April 12, 2008

INFLATION something FRESH

Learning from China's mistakes

 THE GOOD thing about a global crisis is that you zoom up the learning curve at dizzying speed rather effortlessly. A country simply needs to watch its neighbours messing up and chart a wiser course. That saves time, heart-burn and costly experiments.
    Take the desperate attempts around the world to de-link consumer food prices from international markets. Only a country completely food self-sufficient, or rich enough to subsidise every morsel, can achieve it. In the normal scheme of things, beyond a point, it's impossible.
    That stage has come. Most countries, India included, have now reached point nonplus. Having exhausted the export tax/ban-free imports route, they are using crude methods such as price controls and stock limits to hack through the wild jungle of inflation. That is a huge mistake. Administrative ways to control food prices only increase consumer misery. But we don't need to commit this mistake ourselves to figure this out when there is China blundering along ahead of us.
    Spooked by a 18% climb in the consumer price index in one year, two months ago Beijing decided to use price controls to erect a great wall between local markets and the rest of the world. But that worsened shortage of food.
    For instance, cooking oil processors, which need government approval to pass on the full increase in their costs, held back vegetable oil sales while consumers hoarded the supplies they could find. Last month, 250,000 tonnes of vegetable oil stocks were released from state reserves, but the quantity was not enough to make a major price impact. China consumes about 2 mt vegetable oil a month.
    A reining back of prices in March led to a few importers to default on their purchase commitments. What's more, Beijing has to spend even more expensive oil to replace the fast-diminishing reserves. In short, price controls provoked hoarding, price volatility, trade disruption and angst. But India unfortunately appears to be in no mood to learn from China. It wants to stub its own toes rather than get alerted by Chinese consumers howling in pain.
    In his speech at a FAO ceremony Thursday, Prime Minister Manmohan Singh said he doesn't like "blind controls" to fight food prices. But he acknowledged that "pressures would mount for restrictive trade practices." Now how scary is that, especially when consequences of similar idiocy in China are staring at us in the face. Surely that should even persuade the Left as they are
barking up the wrong tree.
    By imposing stock limits on traders and processors, allowing states a freehand to slam down on day-today trade, and using threats to make manufacturers (such as steel companies) cut prices, New Delhi is only causing fur
ther disruption and volatility in the supply of essential commodities.
    When retailers find themselves bound hand-to-foot by red tape, they try to wriggle free by simply refusing to sell. Since no government can force a private shop to sell or maintain adequate supplies, consumers get a rude jolt when they find empty shelves. In panic mode, they start hoarding everything from cooking oil to non-perishables such as rice and pulses. Remember that Airtel ad about a

consumer obsessively stocking up on onions because of imminent price rise? The look of fear and panic on his face becomes universal. The crisis begins to snowball. Instead of containing prices, the government exacerbates their increase.
    Frequent and ill-timed changes in customs duty have a similar effect of freezing normal trade in its tracks. To stay with cooking oil, the biggest effect of zero import duty has been to make it even more scarce in the market. Refined soyabean oil plummeted from Rs 70/kg on March 3 to Rs 53/kg on April 7. That was certainly what the government had wanted. But the unintended consequence was complete chaos in business.
    Importers with older cargoes lying at port are finding no takers because their product is more expensive than the prevailing rate. Traders are in a fix because they can't pick up cheaper stocks without first meeting their prior commitments on older contracts. Branded players cannot cut prices because their dealers have refused to sell older stocks at the new lower price and incur a loss.
    Retailers are charging the maximum printed price on every branded litre because they see this as the last opportunity to make some good profits from cooking oil. In other words, the hapless consumer continues to pay the same Rs 80/l while the entire trade chain makes a loss. It's a nightmarish lose-all situation. To add to the confusion, states have let lose their civil supplies inspectors to wield the baton at will.
    When an administrative measure prevents a business from recovering its legitimate costs, only two things can happen. It can either go underground or disappear altogether. And you won't need night-vision glasses to see this happening all around as more and more "blind controls" start making their presence felt.
    It's natural for India to try to minimise the effects of higher international prices on local consumers. Some of these actions will certainly help stabilise and reduce food prices. But the vast majority are more likely to benefit some groups at the expense of others or actually make food prices more volatile in the long run and seriously distort trade. Decisions made in real time can never be perfect. But we urgently need to learn from others' mistakes. We can't afford to makes them all ourselves.
    nidhi.srinivas@timesgroup.com 



Wednesday, April 9, 2008

India's spectacular story in petroleum refining

India has witnessed a spectacular growth in the refining sector over the years. In 1947, there was only one refinery located in Digboi with a capacity of 0.25 million tonnes per annum.

Subsequently, Standard Vaccum Oil Company put up a refinery in Bombay in 1955: and Caltex at Visakhapatnam in 1957.

Today, there are 14 refineries in the country, 13 in the public sector and one in the joint sector, with an install capacity of 60.4 million tonnes per annum.

Out of the 13 PSU refineries, 6 are owned by Indian Oil Corporation Limited (IOCL), while the other 7 are owned by Hindustan Petroleum Corporation Limited (HPCL) (2).

Madras Refineries Limited (MRL) owns two while one each is owned by Bharat Petroleum Corporation Limited (BPCL), Cochin Refineries Limited (CRL) and Bongaigaon Refinery & Petrochemicals Limited (BRPL).

The one refinery in JVC is the 3 million tonnes Mangalore Refinery & Petrochemicals Ltd.

Demand for petroleum products

The demand for petroleum products is linked with the energy requirements of the country, which is a function of the country, which is a function of the level of economic activity as a measured by the GDP.

Presently India is undergoing major economic and industrial reforms for integrating its economy with the global economy. In the liberalised scenario, the hydrocarbon sector has been identified as one of the main areas of the focus.

Major policy changes are planned for the vital sector to make the oil industry globally competitive. With the reforms package formulated and expected high growth in all economic sectors, the demand for petroleum products is expected to show a compound growth of about 7%.

In absolute terms, the demand for petroleum products by the year 2006-07 is expected to increase from the present level of 80 million tonnes to 155 million tonnes per annum.

Challenges

The challenges for the refining sector are threefold:

  • To build up adequate refining capacity; new refineries, expansion and replacements.
  • To update/implement the emerging technologies to meet the predominant demand for middle distillates
  • To improve the quality of India's petroleum products to make them environment-friendly and globally competitive

In the liberalised scenario, the Government has opened the refining sector to 'Joint Sector' as well as to the private sector for achieving faster growth. About 27 million tonnes per annum additional capacity is planned to come up under PSUs.

Under joint venture, 43 million tonnes per annum capacity will be added in the next 54-6 years. Out of this 43 million tonnes per annum capacity will be added in the next 5-6 years.

Out of this 43 million tonnes per annum capacity, IOCL have tied up with Kuwait Petroleum Company for one refinery, HPCL with Oman Oil Company and Saudi Aramoco for two refineries and BPCL with Oman Oil Company and Shell International for two refineries.

In the private sector, Letters of Intent (LOIs) have been issued for about 41 million tonnes per annum refining capacity.

The companies to whom LOIs have been issued are Reliance (15 MTPA), Essar (9MTPA), Ashok Leyland (2 MTPA), Nippon Denro (9MTPA) and Soros Foud (6 MTPA).

Under the EOU category, about 29 million tonnes per annum capacity has been approved. In sum, additional refining capacity of about 110 million tonnes per annum excluding EOUs is planned for implementation during the next 5-6 years.

Opportunities

Creating additional refining capacity of about 110 million tonnes per annum during the near future will require an investment of over US $ 22 billion. With such phenomenal growth in this sector, there is ample scope and opportunity for the transfer of technologies required and exports of capital goods, etc., to India.

The technologies required will be for upgrading the bottom of the barrel and to meet the predominant demand for middle distillates and also to improve the quality of petroleum products to make them environment-friendly and globally competitive.

Most of the new refineries will be located on the coasts while the major centres of demand for the petroleum products are in the inland locations, particularly in North/North-West regions.

Therefore, there are opportunities for building inland refineries in the country. The refineries in the country are also allowed forward integration in the fields of petrochemicals, etc., for better value-addition, which opens up another vast area for investment.

India has a strong commitment to pursue an energy policy which will take due account of the environmental considerations.

Accordingly, the country is adopting more environmentally benign measures with regard to usage and quality of fuels. Lead phasing-out and benzene reduction in gasoline, sulphur reduction and cetane improvement of diesel are amongst the prominent measures that are under implementation/consideration.

Such quality upgradation of fuels will call for adopting latest/state-of-the-art technology requiring huge investments of the order of  $ 2500 million by way of providing reformulated gasoline producing units, hydrocrackers, hydro-treaters, hydrodesulphurisers, etc.

India's advantages

India has large reserve of trained and highly skilled manpower at a relatively much lower cost compared with advanced countries. Further, with a large population base and a currently very low per capita consumption of petroleum products, India is amongst the fast emerging markets.

The country has also acquired enough experience in the installation and efficient operation of petroleum refineries in the last 35 years.

It is, therefore, considered that the operating cost will be low and the value-addition in Indian refineries will be of a very high order and that the setting up of refineries in India for the domestic market as well as for exports would be economically attractive.




Friday, April 4, 2008

Subprime fallout: RBI wants lenders to play counsellor

Concept Paper Asks Lenders To Set Up Centres To Promote Financial Literacy And Warn Loan Borrowers About Future Repayment Risks

Our Bureau MUMBAI    Banks have been told to place all information relating to fees, interest rates, yields etc. on their websites. RBI is now exploring the option of displaying the consolidated data on all banks on its website and having a dictionary of common terms. Given that customers have an easy access to personal finance these days, it is likely that even though a customer has defaulted a few banks, he may still have access to multiple credit cards. Hence, RBI has urged FLCCs to obtain comprehensive information from the bank with the largest exposure to the defaulting borrower. The central bank has also mooted the idea of having benchmarked quality standards for counsellors and agencies, apart from getting these players accredited.

THE Reserve Bank of India (RBI) is taking proactive measures to prevent a US-type subprime crisis in India. Even as banks push for credit cards and personal loans, the central bank has asked lenders to set up 'credit counselling centres' that will warn borrowers if they are raising loans beyond their means.
    The US crisis had its genesis, with American banks providing home loans to those who can't afford repayment and the authorities are now taking measures to promote financial literacy. It is widely felt that the crisis could have been avoided if borrowers were more aware of their liabilities.
    While Indian banks are more careful on home loans, aggressive marketing of products such as personal loans and credit cards to vulnerable borrowers could give way to overindebtedness and result in these loans turning bad. To avoid this, RBI has asked banks to set up credit counselling centres either individually or collectively. Two of the main conditions for setting up these centres are that they should provide 'free' advice and should not try to sell products by providing investment advice. Also, they should be outside a branch and maintain an arms length relation with the bank.

    In a concept paper, the central bank stressed the need for financial literacy since the common man does not have an access to complete information from the markets. The paper points out that the growing middle class in India is increasingly resorting to debt for funding consumption needs. Against such a backdrop, credit counsellors may help borrowers by offering them sound advice on ways to restructure the debt and better ways of money management.
    The central bank has said that it may convene a meeting of bank CEOs, the Indian Banks' Association, Nabard, cooperative banks, experts and few NGOs to discuss the concept and the mechanism to spread financial literacy. Going forward, RBI has expressed intent to make credit counselling a part of banks' fair lending codes.

    Globally, credit counselling already exists in the US, the UK, Canada, Australia and Malaysia. RBI has specified that even as there is a need to have such centres in urban and rural areas, the focus needs to be different. While rural centres could concentrate on counselling for farmers and those engaged in allied activities, FLCCs in urban locations should target individuals running an overdue in credit cards, personal loans, home loans etc. Going a step ahead, RBI has suggested that public sector banks could focus on rural areas, given the branch network while their private and foreign peers may look towards urban areas.




 

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