ARBITRAGE MAGAZINE - DECEMBER 2017 ISSUE-FINANCE AND INVESTMENT CLUB |FIC PUBLISHING| IIM ROHTAK

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FINANCE AND INVESTMENT CLUB IIM ROHTAK

TEAM MEMBERS 1. ANUPREET CHOUDHARY 2. BHASKAR PODDAR 3. HEMANT JAIN 4. KEYUR BUDDHDEV 5. MAYANK JAIN 6. RUSHI VYAS 7. SHARIKH KADER 8. TANMAY MONDAL

Disclaimer: The views and opinions expressed in this magazine are those of the authors and do not necessarily reflect the opinion of the stakeholders of IIM Rohtak.

© ALL RIGHTS RESERVED FI CLUB IIM ROHTAK

Editor’s Note We are pleased to publish the eleventh issue of ‘Arbitrage’ – Finance and Investment Club’s monthly magazine. Arbitrage aims to cover a diverse range of topics under the wide domain of Finance and Economics. Our goal is to ensure that we provide significant value to the readers through informative articles and articles on current affairs. We would like to thank all the authors for contributing their articles for Arbitrage. In the Article of the Month – ‘Recapitalisation of banks’, the author Shivam Mehra from IMI Delhi, has done a good analysis about the intricacies involved in the bank recapitalization decision.

We hope for the continuous support of our authors and readers to make this magazine a success.

-Finance and Investment Club, IIM Rohtak

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CONTENTS 1. Recapitalization of banks

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2. Foreign Outward Telegraphic Transfer (FOTT)

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3. Merger of Banks – A Not So Financial Way

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4. Rethinking Indian Housing

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5. Recent RBI stance on Interest Rates

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Recapitalization of banks ARTICLE OF THE MONTH

By Shivam Mehra IMI New Delhi, 2017-19 So what happens when a concern is reaping huge benefits, has a great potential, outsiders are envious of the business model of the enterprise and the concern has no near competition? The concern, simply make huge profits, with set of allotted facilities. However, as the concern sees the ravages of time and facilities start deteriorating, the concern see a fall in profit, with higher demand for capital.

Moreover as it happens in any business concern, competitors spring up giving a tough fight for the profits. Plus losses which no one in the same business line had heard of earlier, spring up to everyone’s surprise. This is the story of the Indian public sector banks, which are owned to a larger extent by Indian Government.

So Indian public sector banks, had a no doubt, free reign until the 1990’s, before private counter parts opened their shops. As a result, because of the earlier absence of competition, they made profit by even providing the least services but however with the competitive services of private banks coming into picture, did eat away a major chunk of profit, and customer database. The customers who stayed back, took advantage of the lethargy posed by the public sector banks. As a result, we could see a spike in NPA’s of the banks, since PSB’s were exploited by shrewd businessmen to their advantage.

Source: Firstpost.com

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As per September 2017 report, the state banks have successfully maintained the 8 lakh crore mark in NPA’s over the last 2 quarters, only the steam of growth slowed down a bit, adding only a marginal 1.31% over the previous count of 8.29 lakh crore, as on June 30th June, 2017.

Source: Firstpost.com However the private counterpart are way behind the Public sector banks in term of NPA’s. To quote an exact margin, the private banks are performing better by a huge margin, and have less than 75% of NPA’s in comparison to public sector banks. NPA in the

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end eat away the capital and lending capacity of the banks. Moreover the Basel III norms, of which India is a signatory, has many requirements, one of which requires banks to have at least 4.5% of common equity of the Risk weighted assets. This needs to be looked into since, losses from NPA are written off from capital, thus reducing the overall equity.

The top 10 banks, in the rankings of ratio of gross NPA’s to total advances, is all but dominated by the PSB’s. The top of the list is IDBI, having a NPA ratio of 24%, which means close to ¼ of the capital is but lost to losses, arising from NPA’s.

The 2.11 trillion package, proposed by Indian Government will come in 3 ways.  Issue of Recapitalization bonds by Government of India amounting to 1.35 lakh crore- Government will sell bonds to banks at a fixed ROI and in turn banks will pay money to government and then this money will again be invested in banks by government in form of equity capital thereby raising government stake in banks

The only way to save the grace for public sector banks, hereafter referred to as the PSB is to flush in new equity, which will serve two purposes, providing new equity for lending and to meet the criteria’s of Basel norms.

and effectively banks will have more money to lend and eventually it will lead to higher credit growth and consumption. This is basically done to eat up the excess liquidity which is still available in the banks post demonetization.  Raised from market through issue of equity shares by banks – Rs 58000 crore.  Budgetary allocation – Rs 18000 crore The infusion of money into the system should be adequate, as CRISIL estimates a requirement to the tune of 1.5 to 1.7 trillion in the next few years, by 2019 march to meet the losses springing from NPA evaluations and Basel norms, which are expected to come into action by March 2018.

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However the question remains, how viable is this infusion into the banking sector. Should the Indian Government, time and again come to the rescue of the Indian state banks? No doubt this curtails the spending capacity of the government, as in this case a close to 18000 crore would be made available for the banks, especially after PSB’s have not even contributed something noteworthy for the nation in the past few year. With India’s fiscal deficit target narrowing year after year, this will be a huge burden, which could have been utilized for something constructive as development and infrastructure development which would reap positive results in future.

So, what is a better way ahead? Not something as drastic as completely selling off the public banks to private players. But the government should try and reduce their equity holding in such banks. In the overall picture, these players are just competing among for a smaller margin of customers. The Govt. of India should try and adopt a way, like the State bank of India did. Bringing together 7 banks into its umbrella, and shutting down more than 1200 branches and bringing a rationalization in the entire picture. What this removes, is the redundancy in the picture. SBI got a larger customer base, will incur a lower cost, and no doubt will be able to generate higher profits at lower cost.

A whopping 19 banks excluding SBI and IDBI delivering service to the length and breadth of the country is not a very positive picture. On the other hand a total of 21 private banks, though only 10 having a national presence shows how an integrated structure can provide a better result in comparison to the PSB’s.

No doubt the strategic importance of PSB’s cannot be ruled out, like reaching every nook and corner of the nation and delivering financial independence to the citizens of the nation. However, the surmounting losses, but cry for rationalization of the structure. State bank of India, is a perfect example how with minimum disruptions caused by rationalization, you can achieve praiseworthy results to everyone’s surprise.

No doubt, NPA’s are a fallout of lending. This is the case not only with the public sector banks, but also with the private players, where even the private sector banks have close to 1.1 lakh crore of NPA’s. This is worth discussing. Infusion of capital, will be required every now and then to meet the rising demands for competitiveness. However, there must be a cost benefit analysis before such fresh capital is infused into the structure. And this brings us to our next point of cost benefit analysis.

The government of India, must overcome it’s attitude of recapitalizing or bailing out every other bank. Only banks that tick the following boxes, must find the way through  

Spectacular performance in the past few years, or scope for such performance Strategic importance, like certain banks have strategic presence in areas of high importance A bank too big to fail

It is only when you push someone into the deep water at his own, does he struggle for a while, and then ultimately learns to swim. You cannot forever go on holding his or her hands or guiding him while swimming. The attitude of the Indian Government has been latter, it’s high time we change the attitude to the former stance, and let the PSB’s fight in the competitive world.

Last but not the least, selling of certain banks to private players should not be ruled out. This not only induces a check on the lethargy on the PSB’s, that they might be the next on the list, but also

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provide for private players a great way to expand their network. When the news of Air India, going up for sale came to picture, there were bids flowing in from private players like Indigo and the mightiest Tata’s. The reason behind the same, was the unmatched presence over the hinterland of India, and the untapped power these organization possess. The same can be used for some PSB’s.

We have a whopping 19 PSB’s, restructuring today or tomorrow is inevitable. It is the call of the day, and it is bound to yield positive results in the near future.

No doubt recapitalizing in the present state of affairs, in an image saving move by the Government of India. However, with fiscal deficits targets, pressure of expanding the economy at a higher rate, and good performance of the private banks, Year after year, it’s high time for the PSB’s to raise their games, to show a reason of existence to the outside world.

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Foreign Outward Telegraphic Transfer (FOTT) Rajesh Khanna SP IIM Rohtak, 2017-19 In the present scenario, there are many ways to send our currency to foreign countries. However, sending through the banks by means of Foreign Outward Telegraphic Transfer (FOTT) were preferred by both retail residents as well as business customers. The primary reason for the above is the service charge which is lowest among all the available channels and using banks as one-stop service centre along with their routine transactions. Let us discuss the various purpose through which a customer can send the money as well as the process involved in the same.

Who are the customers?

Foreign Outward Telegraphic Transfer (FOTT) can be done by any person who has an account with the bank irrespective of the branch. FOTT cannot be carried out for non-customers, as verifying KYC and authenticity of the person are mandatory. Customers can carry out FOTT process for various reasons such as covering living expense, overseas education, medical treatment, travel, gift and donations, trading goods, etc.

What is the need?

Customers will usually look for quick service such that the amount reaches the payee at the earliest. In branches, standard turnaround time for completing the process will be around an hour, and the amount would reflect in the receiver’s account in one day (business day). It also varies according to the holiday period of the respective countries. For countries such as Dubai and Australia, banks have to complete the process

before 1.00 PM; else it will take an extra day to be credited to the payee’s account.

Majority of the customers involved in FOTT transactions were doing imports for their business. They usually have their shops located in and around the branch. For example, there can be a customer who would regularly import chemicals from China and carry out FOTT process every week. Non-business customers were comparatively less, and they will carry out fewer transactions like once in three or four months.

Documents required for FOTT The documents that are required for carrying out FOTT is based on imports and non-imports transaction. The documents include Customer request letter It involves disclosing the purpose of the transaction. If non-imports then whether it is sent for living expense, covering medical treatment, donations, etc. have to be mentioned. If the transaction involves imports, then the type of material which is to be imported, quantity and seller’s details have to be declared. The above terms should be explicitly mentioned, and the letter should be addressed to the branch manager.

Form A1 This form is used for the transactions involving imports. It involves indicating the Import License, currency, Pro Forma Invoice number, date of shipment, total invoice amount, description of goods regarding quantity, country

7 of origin of goods, Country from which goods are consigned, mode of shipment (air, sea, rail, river etc.) and approximate date of receiving the goods.

Other details such as forward purchase contract booked against import have to be mentioned if any.

Form A2 It is used for payments other than imports and remittances covering intermediary trade.

Customers can request for a draft, ask for the transfer of foreign exchange remittance directly by providing Beneficiary’s Name, Name and address of the beneficiary bank and Account number. Further, they can also opt for the issuance of travelers cheques or foreign currency notes.

FEMA Form1 It is a declaration-cum undertaking form Under Section10 (5), Chapter III of the Foreign Exchange Management Act, 1999) to declare that the transaction does not violate any rule, regulation, notification, direction or order of Government of India. It also states that the customer purchases the foreign exchange only for the purpose disclosed by him. It further states that the person(s) signing the document has full authority/rights to sign this declaration and undertaking on account/behalf of the company.

Outward remittance towards Direct import bill It is to addressed towards branch manager stating the nature of goods imported along with its purpose and IEC code number. It further involves details of the applicant, details of beneficiary such as Account number, SWIFT/SORT code, IBAN NO., and Correspondent Bank Name (if any). They have to mention details of foreign exchange required with the additional message to be sent along with wire transfer on their behalf and Forward contract details (if any). They have to state Bill of Entry Details, and if the payment is made beyond 180 days from the date of shipment, then the reasons for the delayed import payment have to be explained.

Outward Advance remittance towards imports This form is to be filled if the customer wishes to make an advance or part payment for his imports.

Bank will verify the total amount mentioned on the invoice and payment that is to be made by the customer and then provides the requested foreign exchange volume.

Outward remittance for Non-import It involves the details of Applicant, details of beneficiary such as Account number, SWIFT/SORT code, IBAN NO., and Correspondent Bank Name (if any). Then, customer has to mention the details of foreign exchange required, the purpose of Remittance with Purpose code (an annexure of RBI which involves unique code number assigned to each purpose), Additional message to be sent along with the wire transfer on their behalf and Forward contract details (if any).

Form 15 CA This form is to be filled by the resident individuals as a declaration of their remittance and will be used as a process for collecting information in respect of their payments which are chargeable to tax for paying to a non-resident, not being a company or to a foreign company.

For any payment, chargeable to tax: If the amount of payment or aggregate of such payments during the financial year does not exceed 5 lakh rupees, then the information is to be submitted in Part A of Form No.15CA. Part B of Form 15CA is to be filled only if above remittance is chargeable to tax and such remittance during the financial year does not exceed five lakh rupees and order/certificate u/s 197 or 195(2) or 195(3) has been obtained from the Assessing Officer. Part C of form 15CA is to be filled up for all cases, if such remittance is chargeable to tax, if remittance or aggregate of such remittance during the FY exceeds five lakh rupees and if a certificate is obtained from the Chartered Accountant in Form 15CB. For any payment, not chargeable to tax: The person responsible for paying to a non-resident

8 recipient, not being a company/firm or to a foreign company/firm, any sum which is not chargeable under the provisions of the Income Tax Act shall furnish the information in Part D of Form No.15CA.The following cases exempt filling Form 15CA & Form 15CB. If the deposit is made by an individual and it does not require prior approval of RBI [as per the provisions of section 5 of the FEMA, 1999 (42 of 1999) read with Schedule III to the Foreign Exchange (Current Account Transaction) Rules,2000].

Liberalized Remittance Scheme Form for Resident Individuals LRS Form is to be submitted by the customer declaring that the total aggregate of foreign exchange purchased from others or remitted through, all sources in India during the financial year, including loan provided or gift made in rupees credited to NRO account of non-resident close relative(s), is within the limit of USD 250000. The customer should also certify that the source of funds for making the said remittance belongs to him and he will not use it for prohibited purposes.

These are the forms that customer needs to provide to initiate the FOTT transaction. If they

had the pre-required documents that were mentioned, the entire process would be completed in an hour. Then, internal process for transferring the amount takes place in branch level.

Internal(Final) process After receiving the necessary documents from the customers, their application form along with the proofs will be sent to the nodal branch. The forwarded application should have the signature of Branch Manager and Assistant Manager with a covering letter requesting the transaction. After receiving the form, the nodal branch will forward it to the international Division which in turn debit the amount from customer’s account and credit it to the foreign beneficiary account. Then, the necessary SWIFT charge, currency conversion commission, and FOTT charge will be debited from the customer’s account.

While receiving the goods from the exporter, the customer will be provided with three copies of Bill of Entry. They should submit a copy to customs department, another to our bank and a copy for their reference. They should submit the Bill of Entry copy to the bank within 45 days from the shipment of goods.

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Flowchart representation of FOTT process Customer request letter

Imports

Non-Imports

Form A1

Form A2

Fema Form I

Imports Direct payment Outward remittance towards Direct import bill

Non-Imports

Advance payment Outward Advance remittance towards imports

Form 15CA

LRS Form

Internal(Final) process

Outward remittance for Nonimports

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Merger of Banks – A Not So Financial Way! Ayush Kumar, Shashank Shekhar SIBM Pune, 2017-2019 Are you going to choose your life partner only on the basis of how financially strong other person is or from where the other person hail or what other person’s behaviour is? Marriage is generally a function of many variables. Same is true for Merger of Banks. Banks cannot be merged only on the basis of their financial synergy though it is one of the important variable in deciding entire function of merging. But there are other important factors to be considered like Geographical reach, Human resource Transition.

1. Geographical Reach: It is one of the most important variable to be considered for merging of banks. It would be absurd if a bank which has dominance in northern area is merged with a bank purely in south even though there would be financial synergy between them. There would be problem of regional balance and human resource transition problem.

Manager working in north would not want to go to a southern branch.

2. Financial Burden: Banks having same debt structure would be logical to be merged but only financial aspect should not be the criteria. Also Banks like IDBI which has very high NPA, would be a headache of any parent bank with which it would be merged.

Figure 1 / Source: Self Made

3. Human Resource Transition: Human are most important asset for any industry and same applies to Banks too. They cannot take risk of merging without taking into consideration of human synergy as at the end of day Human would be working in all those locations.

4. Negotiations: Even all the factors are considered before merging Negotiation would take place and if both the party don’t come on the same plate merger cannot happen. Here Political intervention and negotiation between finance ministers also should be taken into consideration.

5. Regional Balance: It is important to preserve the sanctity of any place as not any bank can be sent to North-East region as it would create an imbalance.

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Since Merger of SBI is recently done and it is also India’s largest bank then there is no point in making it more big as the Government is planning to create 5-6 big banks. Let’s check what all available options are.

Figure 2 | Source: Self Made | Data: Bank's Website

Numbers Says All: On the basis of available data from Respective Bank’s Websites it is clearly evident that after SBI, Bank of Baroda has maximum number of Branches and next comes Punjab National Bank and Canara Bank and then Bank of India.

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Geographical Perspective By gathering the data of number of branches in each state for each bank it came into perspective that Punjab National Bank is dominating in the entire northern region. Bank of Baroda in Western Region. United Bank of India in North-Eastern Region. Bank of India in the entire Heart of India and Canara bank is dominating in Southern region. Taking into consideration of geographical domination other important aspect is regional synergy as seen in case of United Bank Of India which has highest number of branches in North Eastern region and hence smaller banks of that region should be merged into United Bank Of India.

Figure 3 | Image Source: Self Made | Icons: Bank’s Website | Data: Bank’s Website

Asset Portfolio(%)

PNB

Allahabad Bank

O.B.C.

Punjab & Sindh Bank

Corporate

45.7

47.1

47.2

46.6

Retail

21.2

27.9

27.3

23.3

Assets(Lakh Crore)

5.96

2.03

2.14

0.85

10.98

NPA(Gross)(Lakh Crore)

0.55

0.21

0.23

0.06

1.05

Advances

4.19

1.51

1.57

0.58

7.85

Gross NPA (%)

13

13

14

10

13.3

Net Income Margin(%)

1.82

-7.89

-5.16

2.31

-0.82

% Branches In Dominated States

60.5

48.9

53.7

79.8

58.7

Figure 4 Source : Self Made

After Merger

Figure 5 Icon Used : Bank's Website

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unjab National Bank has highest number of branches in most of the Northern States which include from J&K to Bihar. So in this case Geographical Perspective is taken into consideration to merge the banks. Banks like Allahabad Banks which has 48.9% of its branches in Northern region similarly Oriental Bank of Commerce has 53.7% and Punjab & Sindh Bank has 79.8% branches which shows their dominance in the northern region are combined into single merged entity where the parent bank would be P.N.B. It is also evident that Punjab National Bank has 2nd highest number of branches after Bank of Baroda from the graph which will make P.N.B. as the 2nd biggest bank in the entire country. Even the asset portfolio of banks to be merged is almost same. So, it will act as a Perfect Merger (Marriage, almost all variables considered).

Table 1 | Source: Self Made | Data: Money Control + Bank's Website

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Figure 6 / Source : Self Made Figure 7 | Icon Used : Bank's Website

Asset Portfolio(%)

BOI

CBI

Union Bank Of India

Corporation Bank

BOM

Corporate

38.5

34.6

44

37.6

37.2

Retail

34.2

23.2

22.6

31.8

24.9

Assets(Lakh Crore)

4.88

2.26

3.93

1.97

1.31

14.35

NPA(Gross)(Lakh Crore)

0.52

0.27

0.34

0.17

0.17

1.47

Advances

3.66

1.40

2.86

1.40

0.96

10.28

Gross NPA (%)

13

18

11

12

17

15.66

Net Income Margin(%)

-3.5

-8.9

1.33

2.5

-10.16

-2.94

% Branches In Dominated States

41.6

29.8

25.8

15.1

72.5

35.0

In

After Merger

the Heart of India no one bank is fully dominant. In Jharkhand and Odisha Bank of India has the dominance whereas in Chhattisgarh Central Bank Of India is the leader whereas in Maharashtra Bank of Maharashtra is the leader. But still Bank Of India has nd 2 presence in Maharashtra and Madhya Pradesh. So, these two banks must be merged along with Union Bank Of India which has Gross NPA as 11% and act to make the finance stronger of the merged entity. While Corporation Bank has most braches in South India but it is merged with Bank of India to give the bank some access in South where the bank can have the customers. Bank of Maharashtra is also merged as it cannot be left being operating only in one state. The most important aspect is that all these banks are dominating in farm sector specific lending.

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Figure 9 | Source : Self Made Figure 8 | Icon Used : Bank's Website

Southern territory is dominated by Canara Bank to a large extent. It is being merged with other banks whose majority of branches are only in those areas as Syndicate bank has 37.2%, Indian Bank 48.1%, Indian Overseas Bank 46.8% and Syndicate Bank 37.2%.

Apart from that, Vijaya Bank is also merged as it has almost same asset portfolio as Canara Bank.

Also Human Resource Transition would be smooth as it would be easy for a manager of southern branch to move in local branch rather than going to a northern branch.

Asset Portfolio(%)

Canara Bank

IOB

Syndicate Bank

Indian bank

Vijaya Bank

Corporate

37.1

45.8

43.7

35.6

38.2

Retail

25.6

24.7

23.6

31.8

27.5

Assets(Lakh Crore)

4.84

2.09

2.61

1.93

1.38

12.85

NPA(Gross)(Lakh Crore)

0.34

0.35

0.18

0.10

0.02

0.99

Advances

3.42

1.40

2.0

1.27

0.95

9.04

Gross NPA (%)

10

22

9

7

3

10.95

Net Income Margin(%)

2.45

14.8

1.34

7.72

5.35

0.15

% Branches In Dominated States

37.8

46.8

37.2

48.1

20

39.5

Table 3 | Source: Self Made | Data: Money Control + Bank's Website

Total

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B

Bank Of Baroda is the next largest bank after SBI in terms of number of branches across India. It has maximum number of branches in western region with Gujarat and Rajasthan contributing to maximum. So, Bank of Baroda is being merged with Dena Bank which has almost exact same financials in terms of asset portfolio but Bank of Baroda has less NPA which can easily absorb higher NPA of Dena Bank.

Asset Portfolio(%)

BOB

Dena Bank

Corporate

41.2

39.3

Retail

16

24.9

Assets(Lakh Crore)

4.96

1.11

6.07

NPA(Gross)(Lakh Crore)

0.43

0.13

0.56

Advances

3.83

0.73

4.56

Gross NPA (%)

10

16

12.28

Net Income Margin(%)

2.94

-7.57

0.83

% Branches In Dominated States

37.1

36.5

37

Table 4 | Source: Self Made | Data: Money Control + Bank's Website

Total

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Figure 11 | Source : Self Made

Figure 10 | Icon

E

astern and North Eastern states have a very delicate Regional Synergy Used : Bank's between them which should not be broken at any cost. This synergy would be Website lost if United Bank Of India would be absorbed in any other bank due to the largeness factor. But at the same point of time making the bank bigger is also important So, it should be merged with UCO Bank which has relatively better presence in the north eastern states.

Even the asset portfolio is almost similar.

Asset Portfolio(%)

United Bank of India

UCO Bank

Total

Corporate

34.2

34.5

Retail

18.5

20.4

Assets(Lakh Crore)

1.16

1.89

3.05

NPA(Gross)(Lakh Crore)

0.11

0.23

0.34

Advances

0.66

1.20

1.86

Gross NPA (%)

16

19

18.28

Net Income Margin(%)

1.88

-10.05

-5.66

% Branches In Dominated States

60.1

19.5

35.9

Table 5 | Source: Self Made | Data: Money Control + Bank's Website

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Andhra Bank is dominated in Andhra Pradesh and Telangana. At present it should not be merged with any Bank but it should be left for the future so that it can be merged with Canara Bank which will make it largest in the entire southern belt.

Figure 13 | Source : Self Made

Figure 12 / Icon Used : Bank's Website

IDBI Bank should not be merged with any other Banks as this bank has already a very high NPA (21%)and if it would be merged with any other bank it will make others’ balance sheet deceased so better left it alone.

Figure 14 | Icon Used : Bank's Website

Asset Portfolio(%)

Andhra Bank

IDBI Bank

Corporate

43.5

52.2

Retail

30.1

47.5

Assets(Lakh Crore)

1.92

2.78

NPA(Gross)(Lakh Crore)

0.18

0.44

Advances

1.37

1.91

Gross NPA (%)

13.13

21

Net Income Margin(%)

1.0

-16.27

% Branches In Dominated States

52.3

40.7

Table 6 | Source: Self Made | Data: Money Control + Bank's Website

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References 

    

Bank’s Websites o http://www.canarabank.com/ o http://www.pnbindia.com/ o http://www.hdfcbank.com/ o http://www.bankofbaroda.com/ o http://www.centralbankofindia.co.in/ o http://www.bankofindia.com/ o http://www.unionbankofindia.co.in/ o http://www.syndicatebank.com/ o http://www.allahabadbank.com/ o http://www.iob.com/ o http://andhrabank.in/english/Retail.aspx o http://www.ucobank.com/ o http://www.idbi.com/ o http://www.indian-bank.com/ o http://www.corpbank.com/ o http://www.obcindia.co.in/ o http://www.unitedbankofindia.com/ o http://www.bankofmaharashtra.in/ o http://www.denabank.com/ o http://www.psbindia.com/ o http://www.vijayabank.com/ www.moneycontrol.com/ https://economictimes.indiatimes.com/industry/banking/finance/banking/government-setsup-arun-jaitley-led-panel-on-psu-bank-mergers/articleshow/61340791.cms https://timesofindia.indiatimes.com/business/india-business/reddy-calls-for-appropriatebank-merger-for-desired-results/articleshow/61488476.cms http://www.livemint.com/Industry/MdGonwoHu8KgFriWG8HVuI/Govt-sets-up-ArunJaitleyled-panel-on-PSU-bank-mergers.html https://www.telegraphindia.com/1171007/jsp/business/story_176607.jsp

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Rethinking Indian Housing

By Parag Nawani, Siddhesh Suhas Salkar IIM Rohtak, 2017-19

Introduction The real estate is one of the most universally renowned sectors. In India, real estate is the second largest employer after primary sector and is expected to develop at 30 per cent over the next 10 years. The real estate encompasses four sub-sectors- hospitality, housing, retail, and commercial. The construction business positions third among the 14 major sectors in terms of direct & indirect effects in all sectors of the economy.

The national real estate market is expected to trace US$ 180 billion by 2020. The housing sector alone contributes 5-6 percent to the nation's Gross Domestic Product (GDP).

Housing is a broad domain that influences multiple industries – banking and housing

finance, cement, steel, power, paints, airconditioners, consumer durables, infrastructure, , building products and capital goods (derived demand) etc.

Issues “The real estate sector’s image has been blemished by project delays, diversion of funds by developers and “broken promises” to home-buyers who have invested their hard-earned money”, said Union Minister for Housing and Urban Affairs, Hardeep Singh Puri.

The sector has largely been impervious, with consumers often unable to obtain complete information or impose accountability against builders and developers due to lack of a strong regulation.

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RERA The Real Estate Regulatory Act (RERA) is a pioneering regulation which will have a longterm transformative effect. Mr. Puri said, “We have put in place an eco-system to guarantee that real estate sector is properly governed and buyers are endowed with more power. I have absolutely no doubt that the history of real estate in India will be written in two segments, pre and post RERA.” “We have also provided various PPP Models to encourage housing through private investment. Among the distinguishing features of this scheme are that the government will make available the land and in addition, assist the allotted in obtaining easy financing from banks for the remaining money required. Besides, there are other processes that the government has introduced to provide a push to the sector. These include ‘Infrastructure status’ to affordable housing, the introduction of section 80-IA under the Income Tax Act and reductions with regard to long-term capital gains tax." he said.

Gaurav Sawhney, President-Sales, Piramal Realty said, “RERA is going to be a game changer for buyers and developers and the broader industry. With its execution, the act will fetch in greater transparency and further consolidation of the industry. A more regulated market means that the borders of laws and policies will no longer be fuzzy and for the first time, every developer will be on a level-playing field that puts the interests of the consumers above everything else.”

Ashish R Puravankara, Managing Director, Puravankara says, "With RERA's postulated compliances, the project launches may happen with lesser frequency than before.

With new launches getting reduced, the appetite for existing inventories will go up but would also eventually shrink. This equation will alter the ongoing demand and supply proposition in the market affecting the prices across the industry."

The way forward Srinivas Rao Ravuri, Senior Fund Manager, Equities at HDFC Asset Management said, “We aim to invest in industries/entities that are expected to benefit from the growth in housing and its allied business activities.”

HDFC Housing Opportunities Fund is a close-ended thematic equity fund that plans to provide long-term capital appreciation by investing primarily in equity and equityrelated instruments of entities, expected to profit from the growth in housing and its allied business activities.

“We consider that the housing sector is likely to be a big growth driver for the nation.

Affordability of housing has enhanced with stable prices, improved income levels and decline in mortgage rates. Further, ‘Housing for All’ by 2022, program of the government has started gaining momentum.” said Mr. Ravuri.

Mahesh Nandurkar, Strategist, CLSA India said, “One of the sectors that we have been very bullish on for a while now is the housing construction sector. Both in volume terms and value term, the market has remained plane and we sense that the housing segment is now at the tipping point and the development should be likely going forward because of two reasons- the primary one is the housing affordability, measured as the ratio of mortgaged payments and household income has gone down to an all-time low.

Also, there is government effort to push the sector.”

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India has an arduous task as it begins to revive from a decade-low growth rate of 5% in 2013. In its passage of re-stimulation, the housing sector is set to play a central role. On one hand, housing shortage of nearly 63 million units presents both a critical issue and an on another hand, an opportunity. The demand for houses is anticipated to increase by additional 26.3 million units in the next 3 years due to population progress at the current rate of development. These statistics call for PPPs; providing motivations to form such alliances would provide an impetus towards the solution to the critical issue.

India's young labour force, which is approaching home-buying age and positioned to benefit from the country's economic development, is expected to considerably drive the real-estate market over the next decade.

The convergence of factors, including an estimated sharp upsurge in the nation's per capita income, urbanization and stable government regulations, would thrust annual property market sales, which were $105 billion in 2015, to $462 billion by 2025, according to a latest Morgan Stanley Research report.

India’s property market sales are anticipated to grow at an average of 16% CAGR from

2016-25, according to Morgan Stanley’s analysis. This is similar to China’s 22% CAGR from 2004-15.

Comparing beyond the two nations’ development, Sameer Baisiwala, Morgan Stanley said, “To us, the macro paradigm of China in 2000-04 and India in 2015 seem quite similar in terms of size of the economy, affordability and growth prospects. For instance, China achieved $1.9 trillion GDP in 2004, compared to India's $1.8 trillion GDP in 2015. In 2000, the median age of China's population was 29, compared to India’s median age of 27 in 2015. The percentage of China's urbanization rate in 2000, or population living in urban areas, was 36%, compared to India’s 33% in 2015.”

There are some key differences as well between the conditions in the two nations.

The Morgan Stanley forecast of 6.75% GDP growth for India during the next decade is lesser than the 9.7% growth China achieved in the past 15 years. And although India has strengthened the federal government's role in its real-estate market, the Chinese government took an even bigger role in the regulation of its real-estate market.

Additionally, India's decrepit infrastructure can be a drag on economic development.

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Figure [1]

source: Economic Times

The total demand for urban housing is expected to be 4.2 million units during the period 2016-2020 across the top eight cities, as per report released by Cushman & Wakefield. The data on the cities can be viewed from figure [1].

It is further projected that LIG would be the most under-serviced section. While it is expected to generate a demand of about 1.98 million units by 2020, the supply provided by private developers is barely 25k units. Similarly, though the MIG accounts for 63% of the total housing supply across eight cities between 2016 and 2020 at 647,000 units, the demand is assessed to be a much higher number of 1,457,000 units. The relevant figures are shown in Figure [2].

Figure [2]

source: Economic Times

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Conclusion The Housing market in India is poised to play a pivotal role in the development story of our nation. With the introduction of RERA, the scenario is expected to change completely.

Few of the changes that can take place are as follows: Developers will overhaul their business models Other than RERA, the Goods and Services Tax (GST) and the Benami Property Act will also have a major influence on how developers run their businesses.

Demonetisation did not affect the selfgoverning developers with the right products directed at the working masses. The rest have realised it is time now to renovate their existing business models if they want to remain in the business.

Co-working: India Inc. will move towards ‘hybrid’ spaces Co-working spaces are coming up across

Indian metros as well as Tier-II cities, providing new ventures with flexible working options at affordable rents. There were approx. more than 100 operators in this space across India, while there is less supply of such places.

Thrust towards affordable housing Affordable housing in India is eventually set to get the much-coveted infrastructure status.

With the population growth in India, and a large demand for houses in the coming years, the affordable housing is a clear outcome.

Lastly, it is to be seen that the Indian housing is at the crossroads. How this sector would perform would be vital for the nation’s growth. The RERA act and other regulations would prove challenging to the real-estate developers. What would they have to provide to the consumers is yet to be seen. It would be quite interesting to watch how this new stream of events is handled by the stakeholders. Let’s see how do they RETHINK INDIAN HOUSING.! i

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RECENT RBI STANCE ON INTEREST RATES Arvind Singh, IIM Rohtak, 2016-18 Repo Rate CRR SLR

NOW

JUN

6% 4% 19.50%

6% 4% 20%

In the current quarter India has seen a

According to the analyst’s estimation, any

rebound in the GDP growth is at 6.7% by the

price above $60 per barrel will put heavy

latest bimonthly data released by RBI and the

pressure on the exchequer. Being an external

central banks has decided to maintain the

factor oil prices can’t be easily curbed.

status quo and left the key rate unchanged at

Talking about the onion prices which has

6%. The main issue that has caused the

kept the incumbent government always on its

decision is fear of inflation moving out of the

toe. The December harvest should bring

grip. Now CPI 4.88 which is well above the

down the prices, but the onion prices have

target. We are going to look at the major

risen more the 100%. Maintaining the

factors which can be influenced by RBI’s

liquidity is a very sensible step on the part of

decision.

RBI.

The Target inflation: this time the inflation

Bank’s credit Growth: already depressed

is rose on the back of soaring onion prices,

credit growth (2.4%) is once again going to

vegetable prices and fuel prices. The

suffer due to the decision as banks generally

persistent surge in oil prices surge is due to

don’t transfer the entire rate cut to the

the geopolitical changes and ascending king

customers, this will directly impact the

of Saudi Arabia focusing on the production

consumption which was anticipated in the

cut. Generally, oil prices rise when winter is

expectation of the rate cut. It will hamper the

around the corner. Also, the USA Fed rate

public bank’s credit growth.

hike may increase the price further.

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GROSS NPA

INR 8.5 Trillion

NPA%

9.50%

NPA in one LOOK Economic Growth: the public consumption

Export: the export has risen on the back of

will not get any stimulus, and hence this

low base effect and recovery in the USA and

input to the GDP will not take it anywhere.

European economies. The recent rate hike by

However, the low base effect may give some

US Fed may benefit the export.

boost to macro indicators. The unemployment problem may continue to be same as the industrial output remains low.

The investment growth may remain

Rupee: as the US Fed has sent the rate up by 25 basis points, any increase in the rate by RBI would bring down the rupee against dollar.

lukewarm.

To maintain the growth trajectory low Stock Market: Indian market is continuing on a Bull Run and expected to be there as earnings are improving. Additional liquidity may have given bounce to the ounce nonetheless; markets are soaring as of now.

However, in long run inflation may have some negative impact on the market. Clearly, nobody likes inflation. The FII’s may remain, net sellers, if the dollar rises against the rupee in the wake of the recent rate hike by US Fed.

inflation is mandatory. Currently Indian economy is just coming out of the brief lull due to the double whammy of GST and Demonetization. It is difficult to ascertain the 25 basis points cut because right now the economy is rebounding and it’s in dire need of investment and consumptions. Private projects are few due to ripple effects of NPAs. Now key indicators like sales of automobile and infrastructure have seen some

FII remained net seller by selling assets

growth. Unemployment in unorganized

worth INR 4728.97 Crore. However DIIs are

sector is a bigger problem than in organized

still bullish and continue to be net buyers.

sector. Retail credit growth is all time low.

Public Saving: Inflation can have a deleterious effect on the public saving, so the

Seeing these entire factors rate cut could have been justified.

step taken by government can be helpful as

But inflation has just risen due to oil and food

long as the inflation is contained.

prices. Excess liquidity could worsen the

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situation or not?? According to popular

important because behemoth like SBI can’t

economic theories, monetary policy has a lag

afford to be unprofitable if it wants to a part

time of around nine months, which

in India’s growth story.

essentially means that the effect of current monetary policy will be visible in next nine months. Until that time food prices can be brought down by monsoon crop.

Conclusion: for short time period the status quo can be justified but if India wants to remain attractive destination for investment then liquidity has to be infused. To fund

Recapitalization plan: a rate cut would

growth and infrastructure capital is needed

make it more potent. The ambitious

and then unemployment can also be brought

recapitalization which will help banks

down. Hence, in longer term rate needs to be

maintain the capital adequacy ratio by

adjusted to fuel growth trajectory.

infusing INR 2.1 trillion rupees, and rate cut will increase the credit growth at attractive margins. Keeping banks profitable is utmost

Situation is too dicey to change, let’s keep status quo

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CALL FOR ARTICLES Finance and Investment Club of IIM Rohtak invites articles from all Business Schools across India. The article should be original and should be related to finance and economics. All the reference should be cited and sources of images should be mentioned clearly.

The winner of the article of the month will get Rs.300/- with an ecertificate. All the other selected articles will be published in our magazine ARBITRAGE Instructions: 1. Please send your articles before 25th January, 2018 on www.dare2compete.com competition.

2. Do mention your NAME, INSTITUTE and BATCH with your article 3. Font: - Times New Roman, Size: - 12 in word .doc/.docx 4. Please DO NOT send PDF files and kindly stick to the format 5. Number of authors 2 at max 6. Maximum Word Limit: 1500 words, Minimum Word Limit: 500 words 7. Naming Convention: Name1_Name2_CollegeName.doc 8. Any Image without the source or label will not be accepted IMPORTANT: The article should be original and should not have been/should not be published elsewhere. You will be disqualified if you violate the same.

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Finance and Investment Club Indian Institute of Management Rohtak Disclaimer: The views and opinions expressed in this magazine are those of the authors and do not necessarily reflect the opinion of the stakeholders of IIM Rohtak.

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