Foreign Loans Hit Year’s Low on EU Crisis, Fall

Decline in approvals points to slowdown in investments and new project proposals     Overseas borrowings by Indian companies plunged to a year's low as the European sovereign crisis forced banks to shut doors on Indian firms and corporates opted out of the market after the collapse of the rupee. The fall in approvals for foreign borrowings also reflects the overall slowdown in investments or proposals for new projects due to lack of clarity on economic policies as decision-making has nearly stalled in the government.  External commercial borrowings, the most favoured route to borrow funds for top corporates till recently due to interest rate advantage, fell to $1.2 billion in November from $4.12 billion in July, data from the Reserve Bank of India shows. There was about 400-600 basis point difference between Indian and London rates. A basis point is 0.01 percentage point. "Market is challenging with banks becoming selective," said Manmohan Singh, MD & head of debt capital market, Royal Bank of Scotland, the top bond arranger last year. "Cost of funding for banks has gone up, which in turn has pushed up cost of borrowing for corporates." Companies are shelving borrowing plans as lenders such as BNP Paribas and Societe Generale hold back from lending and improve their capital by selling off assets. Investors fear that the crisis in European sovereign credit could push up rates further as distrust among banks leads them to park funds with the European Central Bank, which are at more than €400 billion.  "European banks that are large financiers are staying away from the market," said Parthasarthy Mukherjee, head of treasury and international banking at Axis Bank, the second-ranked domestic debt arranger. "Overseas borrowing costs have been very volatile. An Indian corporate with AAA rating can access dollar funding at about 6%. This was much lower at 3-4% last year."      Also, companies that used the interest rate arbitrage between the domestic and international markets were bruised by the sudden collapse of the rupee against the US dollar since August. The Indian currency lost 8% in the December quarter alone.  The losses of Nifty 50 companies in the December quarter due to the rupee's fall are estimated between . 3,500 crore and . 4,000 crore, according to rating company Crisil. These companies had nearly a quarter of the . 1.5 lakh crore of debt in foreign currency.  With corporate morale at a low, investors look for signals from the government. "At the moment, the key concern is the dip in underlying capital expenditure," said RBS' Singh. "Corporates are looking for signals on policy issues and on the interest rates front."

Unitech to Sell Non-core Assets to Pay off Debt

Company plans to reduce debt by 10-15% every year through sale of assets

    Real estate firm Unitech will sell non-core assets such as land, IT parks and SEZs to pay off its debt, which currently stands at . 5,300 crore. In a rare interview Unitech managing director Ajay Chandra said the company, India's second biggest real estate company after DLF, has also managed to tie-up debt of about . 550 crore from two public sector banks in the last few months, after facing significant debt financing crisis in the last six months. 

Mr Chandra said the company would raise . 300-400 crore this year by selling land parcels, including one in Thiruvananthapuram. Unitech has also started talks with various private equity funds as well as overseas real estate investment trusts (REITs) to sell its four SEZs and one IT park. The company has close to 5.5 million sq. ft. of rent producing office space and another 2 million sq ft will be ready in the next 18 months. This is spread over four SEZs and one IT Park. Mr Chandra pointed out that the sale of SEZs would be completed in the next fiscal year as they now await the reaction of the SEZ authorities on some of the other SEZ transactions that have taken place in the market recently. "In the meanwhile, we will not lose any money as we are already earning rent from these assets," he said. In the April-June, 2011 quarter, the company reduced its debt by . 203 crore through its cash flows. Unitech's debt has come down from a peak of . 10,500 crore at the end of December 31, 2008. Yet, the interest burden has not reduced owing to regular increase of bank rates. "The two big challenges for the industry today are mounting debt and lack of financing. We all have to move towards lesser debt than we have been used to before. Our debt to equity ratio is currently at 0.4, which is a low level of debt but it needs to be lower," he said. "We intend to raise close to . 500-700 crore annually for the next few years through sale of these assets. The target is a 10-15% reduction of debt on an annualised basis," said Mr Chandra. 
For the last six months, Unitech has had to face severe debt financing issues, both because of the problems around the industry as well as the 2G scam, in which, one of the company's promoters is in jail for the last four months. In the last couple of months though, the company has seen some movement among banks. "We got a first sanction from a PSU bank in themonth of July for . 350 crore, which we will take in tranches," said Chandra. It has also tied up . 200 crore from another PSU bank, which will be disbursed in the next few months. 
On Monday, Unitech's shares recorded an intra-day gain of 13% after the CBI told the special court that it has no evidence that Unitech Wireless, which has been charged with cheating, criminal conspiracy and forgery in the 2G spectrum scam, paid bribes to A Raja, the former telecom minister.

RBI WILL HAVE THE LAST WORD Bank Window Opens for Cos with Stoppers

India Inc excited as draft norms will not be too difficult to meet for cos with strong credentials

    After years of intense lobbying, business houses wanting to set up banks are spotting a ray of hope. The Reserve Bank of India is slowly opening the doors for corporates to enter the highly-regulated industry, but with caution, conditions and caveats. 
In draft guidelines issued on Monday, the banking regulator laid down the broad rules of the game: finance companies can be converted into banks, and promoter groups with "sound credentials and integrity" and a 10-year record of successfully running their businesses can set up banks. 
Such banks should have a minimum paid-up capital of . 500 crore, run 25% of their branches in rural unbanked regions, list within two years, and be owned by a separate holding company that cannot borrow money to float the bank. Total foreign holding in the bank cannot cross 49% while the operating company must lower its stake to 20% by 10 years. 
Corporates may find it easy to meet most conditions, but the RBI has spelt out it will be "very selective" and have the last word. "…it may not be possible to issue licences to all the applicants meeting the eligibility criteria…," said the draft note. A key pre-condition is changes in the Banking Regulation Act to empower the RBI to supersede bank boards and block purchase of 5% or more shares if the investor is not "fit and proper". 
India Inc, nonetheless, is excited. Reiterating the Aditya Birla Group's "strong intent to enter banking", Chairman Kumar Mangalam Birla said it was a "forward step" while Bajaj Finserve MD Sanjiv Bajaj said the guidelines were "practical" and "Bajaj Auto and Bajaj Finserve are eligible". A senior Tata Group official said it was a "positive" move. 
Banking on New Rules 
The Hurdles 
No new licence till laws change to give RBI more power Negative feedback from other regulators can dash chances Comments from CBI, ED & other govt agencies can backfire 
The Race 
Tatas, Aditya Birla group, Bajaj, L&T, LIC Housing, M&M, Shriram group, Reliance, ADAG, PFC, IFCI, Religare, Srei may be interested Edelweiss with active broking biz may lose out; IDFC & IndiaBulls said they are not interested in banking 
THE RULES 
Paid-up cap of Rs 500 crore, listing within 2 years No foreign entity/NRI can hold over 5% shares Biz groups will have to float a holding co to own bank & other financial services like insurance, broking etc Some Time before RBI Issues Licence 
Even though the financial services business has been a pitfall for several corporate houses in the last two decades, most have harboured hopes of promoting banks. "It's a high-risk business and you have to be paranoid to run it," said Uday Kotak, whose group had received a banking licence in the last round (2003-04). But like others, he too was enthused on Monday: "I hope this bodes well for the government as it plans to move on the reform path." 
The RBI, which has had to deal with shady promoters holding benami shares, brokers taking over treasury of small private and co-operative banks, and flamboyant promoters cutting funny deals with diamond merchants to borrow money for the bank, is understandably paranoid. Under the current norms, promoters will have to declare their source of funds and no single entity or group, other than the operating company, shall have direct or indirect shareholding in excess of 10%. "The draft guidelines reflect the RBI's learnings from bank failures. For instance, restricting exposures to suppliers and customers of industrial houses where it is a promoter is really seen as a form of connected lending and self-dealing," said H Jayesh, founder partner at law firm JurisCorp. 
While corporates will now pressurise the government to amend the BR Act, it will be some time before the RBI issues the first licence. According to Ashvin Parekh, partner, Ernst & Young, "It may be 2-3 years before we see a new bank becoming operational. Diversified ownership and exercise of regulatory control are essential conditions...There have been instances in the past where promoter shareholding was not pared according to plans." 
Some aspirants like Religare were confident they would be able to fulfil the RBI's criteria. "Religare Enterprises Limited (REL) is already regulated by the RBI. Besides, they have also separated ownership and management, and today majority of Religare Enterprises' board members are independent of the promoter group and the promoters themselves do not participate at the REL board level," said a Religare spokesperson. 
Anil Ambani's Reliance Capital said it was looking forward to the release of the final guidelines while N Sivaraman, president, L&T Finance Holdings, said "two years is too short a period for a new bank to get listed". Considering the time a new bank would require to create a base and brand to raise money, a fiveyear period would have been better, he said. Among the eligibility conditions outlined by it, the RBI will collect feedback from other regulators as well as agencies like CBI and Enforcement Directorate while deciding on an application. Conditions like these have created a widely shared perception that the central bank may not be in a hurry to grant licences till some of the ongoing investigations are over. "While the RBI will have a lot of discretion, it has framed the guidelines with an open mind…there may not be any hidden lever," said Saurabh Tripathi, partner & director at The Boston Consulting Group.

Chennai pips Mumbai in home loan race Tier-II Cities Drive HDFC Growth: Parekh

 It's been almost 18 months since Deepak Parekh moved on from becoming executive to non-executive chairman of HDFC. Despite the move, Parekh continues to have his finger on the pulse of the economy and the company. And why not? Apart from captains of industry, even the government pays attention when he speaks. It's small wonder then that he is on some of the most important committees formed by the government on segments like financial inclusion, infrastructure, real estate or manufacturing. In an interview to TOI, he spoke of how jobs could be threatened with the slow pace of manufacturing activity as well as how the housing loan market continues to grow in healthy double digits, driven by cities outside the metros. Excerpts. 

There is a lot of talk about a slowdown in economic activity yet areas like home loans are showing good 
growth. Is there any cause for concern? 
    It is certainly a worry. Because of inflation and higher interest rates, the tempo of sales growth has been affected. You can see the slowdown in auto and auto ancillaries. Besides sales, margins are also down by a few basis points because manufacturers are not able to pass on to customers the higher cost of inputs—be it freight, materials or steel. While we can still aim at a 7.75% to 8% growth, we need more manufacturing because if we don't where are the jobs going to come from? No one is talking about new factories. Those wanting to do so are getting delayed either because of not getting an approval or land trouble. Basically, there is uncertainty and uncertainty leads to a slowdown. Yesterday I met a top industrialist who told me; 'I don't want to set up a new project because I don't know when will it be completed'. 
What is causing this uncertainty? 
    It is just lack of decision by bureaucrats and politicians. The media has created so much of a scare that honest people are scared to take a decision. There is total paralysis in policy. My hope is that there is this ministerial and bureaucratic change that has happened and is happening…and this will lead to quicker and more transparent decision making. I am sure there will be a huge cleansing effect because of what has happened. Today we have politicians, businessmen, bureaucrats, government employees, professional accountants, managers all in jail. Both the giver as well as taker of bribe is inside. So the giver of the bribe will be more cautious now. 
What is the trend in real estate prices and loan disbursements…Are high 
prices deterring buyers? 
    Prices have not gone up so much in smaller cities. There is a huge growth in tier-two cities. Today our business in Chennai is bigger than that in Mumbai. Chennai has overtaken Mumbai and ranks as the second largest market after the National Capital Region in loan applications. Hyderabad boomed a little but last year because of the Telangana issue, business is a bit slow. Pune and Ahmedabad, however, continue to grow. 
Have real estate prices 
peaked? 
    Real estate prices have stabilized. Builders may not have brought it down but they are not increasing prices. It depends on their holding power. If RBI keeps hiking rates, automatically the demand will come down. 
What is your take on the 
RBI's policy paper on holding companies? 
    There are certain issue like stamp duty and taxes. There is a stamp duty implication on transfer of assets and there is the issue of a 17% dividend distribution tax that is payable at every level. These are not part of RBI's mandate and they will have to convince CBDT and revenue department. Things like that need to be done to make the report on financial holding companies workable. 
Would HDFC continue to infuse capital in HDFC Bank to retain stake? 
    The last time we invested Rs 4,000 crore in the bank was when they raised capital for the merger of Centurion Bank. I don't see them needing capital for the next two and a half years. We will address the problem when we come to it. 
HDFC also has large investments which were to be transferred into a special purpose vehicle to realize value… 
    We first thought of doing a separate SPV but it was time consuming and there were conditions on our investments so we did not go ahead. But we have sold several of our unlisted companies—we sold IL&FS, we sold our investment in Lafarge and we sold stake in Intelenet. We also sold our holding in Siemens at 30% premium to market price in response to their open offer. The sales 
were either because we felt the investment had peaked or because something had happened which was detrimental to our holding. So it is circumstantial and there is no compulsion to sell every quarter. 
When will your real estate fund book profits? 
    We have many real estate funds—domestic and international. In our Rs 1,000-crore domestic fund, we aim to repay Rs 1,000 crore by end-September so that at least the principal is paid back to investors which include SBI and other institutions. We will divest the remaining holding in future years when we get an opportunity. It's too early to talk about returns but we are targeting 15-20%. 
What about HDFC's foray into education? 
    We are still discussing. We have not decided how to go about the subsidiary. It is still premature as we do not have board approval yet. Vocational is one thought because we are convinced about the need in information technology, ITes, travel and tourism, which would help in skills upgradation.

Deepak Parekh | CHAIRMAN, HDFC