Going north: Property prices, among other things, continue to rise

Japan, in the 1980s, was a great place to be in. asset prices were surging ahead, as was demand; money supply and credit offtake was also on the rise; and this economic expansion, it was being predicted, would continue almost indefinitely. Then, reality struck. The "boom", it transpired, was fuelled by an asset bubble that finally burst in the early 90s. Property prices plummeted and a decade-long recession followed. The country is emerging out of its shadows only now.

There are eerie similarities with the situation in India today. Property prices, bullion, stocks (albeit to a lesser extent than was the case three months ago), the cost of living (though not the inflation rate, but that's because of statistical jugglery by the government), the cost of money and demand for all the assets mentioned above are all going up. But the most elementary laws of economics tell us that price and demand cannot keep moving in tandem for any significant length of time. Something has to give, sooner rather than later. So, is the long awaited correction just around the corner, or, more scarily, is the Indian economy entering bubble territory?

Before answering that question, here's a concrete example: interest on home loans has moved up from 7-7.5 per cent a year ago to 9-9.5 per cent now. This means a borrower with a Rs 15-lakh loan (tenure: 15 years) now has to shell out Rs 1,800 more per month than he had to a year ago. Where will this money come from? And for how long can consumers keep bearing this with a smile? Already, banks like HSBC are seeing a slowdown in home loan disbursals compared to six months ago. That is only a starting point. Higher interest rates will increase the holding costs of people who have bought real estate for investment or speculative purposes. The scenario may turn ugly if several such owners turn sellers and hit the market within a short span of time.

Economists, however, insist IT's business as usual. "The increase in the lending rates is quite realistic and is more sustainable in the long run," says T.K. Bhaumik, Chief Economist, Reliance Industries. "Earlier, because of the liquidity overhang, banks were offering rates that were unsustainable in the long run."

But a Business Confidence Survey by the Federation of Indian Chambers of Commerce and Industry (FICCI) for the first quarter published this month (August 2006) rings warning bells as high oil prices and hardening domestic interest rates squeeze profit margins and put investments plans under pressure.

"Corporate India is clearly concerned about its near-term performance on all operational parameters namely sales, selling price, profits, investments, employment and exports," says the FICCI survey. "There has been a strong moderation in the views of the Indian industry with regard to economy-, industry- and firm-level performances," the report adds. The outlook on investment suffered a decline, too; only 50 per cent of the respondents projected an increase in investments in the next six months compared to 65 per cent in the previous survey conducted in 2005.

The Reserve Bank of India, meanwhile, is keeping a wary eye on the real estate market and is going slow on clearing foreign investment proposals in the sector. Its rate tightening programme also clearly points to efforts at cooling an overheated asset market. This may be just the prescription to prevent the formation of an asset bubble. But it will have to walk a tightrope. The last thing it wants is to price money out of the market and slow down loan-fuelled consumption and investments. Says Anjan Roy, Advisor, FICCI: "As long as the economy continues growing, minor changes and fluctuations can be taken care of."

INSTAN TIP
The fortnight's burning question.

Should RBI change norms that say heads of banks cannot be directors on the boards of other companies?

Yes. R. Seshasayee, President, CII

The legislation which prohibits bank heads from taking board positions in companies merits a thorough examination and amendment to ensure freer movement of talent without any conflict of interest.

Yes. Surjit Bhalla, MD, Oxus Research

This is one of the norms in the Reserve Bank of India's rulebook which is completely incompatible with the reality of today's globalised economy, and should be given a burial. You can own a bank and sit on the board of another company. So, why can't you head a bank and do the same?

Yes. Shardul S. Shroff, Managing Partner, Amarchand Mangaldas

If the possible conflict of interest can be resolved to the satisfaction of the regulator, there is absolutely no reason why a person should not become the head of a bank and sit on the board of another company at the same time.

-Compiled by Kapil Bajaj

Q&A
"We Will Adopt The Villagers"

Tata steel has decided to "adopt" the people who will be displaced by its proposed steel plants in Orissa, Jharkhand and Chhattisgarh. Its Managing Director B. Muthuraman discussed the issue with BT's
Ritwik Mukherjee. Excerpts:

What prompted you to think on these lines?

Most rehabilitation and resettlement (R&R) efforts in the country have not been implemented to the satisfaction of the displaced people. So, we have decided to give a commitment to the displaced people that we will improve their quality of life by making them a part of the Tata Parivar.

What exactly do you mean by the term "adopt"?

We will employ those who have the requisite qualifications; those who can be trained will be trained to make them employable; some will get help to gain self-employment. We will monitor each family's income at regular intervals and ensure that their income levels go up after the displacement from their original homes.

How many people will be brought under this new programme?

We will try to ensure that there is minimu displacement. In Orissa, this figure could be 500-600 families. In Jharkhand and Chhattisgarh, the numbers will depend on the land we are allotted.

Banking On Art
Paintings can be used as collateral.

Art against loan: Husain's work (above) is readily accepted

One can now bank on art-literally. Some of India's biggest banks have begun accepting art as collateral against loans. "The Indian art market is buoyant because of huge foreign interest. And financial institutions are trying to gain an understanding of the art market," says Sujan Sinha, Vice President (Retail Assets), UTI Bank, which has advanced loans against artworks. Works by artists like M.F. Husain, F.N. Souza, S.H. Raza, J. Swaminathan and Tyeb Mehta, among others, who are well known in the auction circuit, are readily accepted by banks as they can be easily valued and, in case of default, can be readily disposed off.

"While the diversity of artists is an important aspect, the track record, experience and financial position of the art house evaluating the work also play an important role," says Sunil Gulati, Group Head (Risk Management and Corporate Development), Yes Bank. Loan amounts against artworks can vary between Rs 5 crore and Rs 20 crore depending on the size of the inventory offered as mortgage and the financial credibility of the company seeking the loan (individuals and art houses or galleries too are eligible).

"The whole concept of providing financing against art is at a nascent stage in India and future development will depend on the experience over the next few years. It's still an emerging area and we need to gain better understanding and experience before scaling up," says a cautious G.V. Nageswara Rao, CEO (Commercial Banking SBU), IDBI Bank, which has also debuted in this market.

Art house owners are naturally ecstatic as it allows them to raise money against their stock in trade. "It is definitely a positive step towards building trust between financial institutions and the art world. The momentum is strong and significant growth is inevitable," says Neville Tuli, Chairman of Osian's, which recently raised loans against its art collection for financing its working capital requirements.

-Pallavi Srivastava

Coming Of Age
The outdoor ad space is getting organised.

Consolidation: That's the buzz in the outdoor ad world

Outdoor advertising in India may finally be coming of age. There are several reasons for this. For one, the definition of "outdoor advertising" has undergone a rather dramatic change. "Any advertorial content displayed at any contact point outside the home comes under the purview of this term now," says Sandip Vij, President, Optimum Media Solutions (OMS), the media specialist division of Mudra Communications. Adds Soumitra Bhattacharyya, CEO, Madison Outdoor Media Services (MOMS), the outdoor advertising arm of Madison India: "People are now spending more time outdoors." The implied meaning: ads are simply going where consumers are. The outdoor medium, in fact, has always had the reach and is also, arguably, among the cheapest vehicles available. The major constraint, though, was quality. The evolution of large format digital printing solved that problem and now, even high-end marketers, are turning to the outdoor advertisement segment.

Attitudes and technology aside, the proliferation of the costs associated with the broadcast media has probably been the single biggest driver of growth for the outdoor advertisement segment. "The outdoor medium has emerged as a significant alternative to satellite TV channels and the print media," says Bhattacharyya.

But historically, this segment has been controlled mostly by small-scale and local-level hoardings companies and is, therefore, highly fragmented. But over the last year, some consolidation has started in this space. Agencies such as Kinetic (the newly formed outdoor media buying arm of the WPP Group) and Primesite (promoted by Mudra) are making significant inroads into this sector. The main attraction, obviously, is that it accounts for about 7 per cent of the Rs 13,800-crore Indian advertising pie and its projected annual growth rate of 15-20 per cent.

-Aman Malik