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Wednesday, December 05, 2007

Fitch and Bad Loan Problems in India

From Bloomberg this morning:

Indian banks may see bad loans swell as interest-rate increases this year failed to deter consumers from borrowing more, Fitch Ratings said in a report today.

Bad loans from defaults on home mortgages could rise if interest rate increases this year are followed by a decline in property prices, the credit assessor said. About half of loans to individuals are to buy homes, the prices for which have doubled over the past two years in south Mumbai, according to Cushman & Wakefield.

``Consumer loans typically carry higher risk and delinquencies would depend on underwriting standards of individual banks,'' said Vishal Goyal, an analyst with Edelweiss Capital Ltd. ``It is not a concern at this point in time because banks are anyway charging higher risk spreads on such loans.''

India's bank lending rates rose this year after the central bank raised the cost of borrowing to contain inflation fueled by real estate purchases that were funded with loans. ICICI Bank Ltd., the nation's second biggest, and HDFC Bank Ltd. gave 33 percent more loans in the three months to Sept. 30, while loans by State Bank of India, the biggest, grew 26 percent compared with a year earlier.

``The need to access capital may come into sharper focus if the credit cycle deteriorates,'' Fitch said.

Indian banks may find it more expensive to raise capital overseas, with rising rates prompting some to delay borrowings, Fitch said in the report. The need to raise capital ``could well provide an impetus for consolidation'' among banks, it said.

Higher Credit Demand

Still, banks would continue to benefit from rising credit demand as companies invest further to gain from a growing economy, Fitch said. India's $906 billion economy will probably post its third year of at least 9 percent growth in the year to March 31.

Housing Development Finance Corp., which is 12.6 percent owned by Citigroup Inc., posted a decline in bad debt and expects to meet its annual loan target of 25 percent, Chairman Deepak Parekh said yesterday in New Delhi.

The strengthening of the rupee against the dollar could hurt smaller textile exporters, Fitch said. The local currency is headed for the biggest annual gain since 1974, increasing more than 12 percent this year against the dollar, data compiled by Bloomberg showed.

India Private Equity Deals May Grow 40% in 2008

From Bloomberg this morning:

Carlyle Group, the world's second- biggest buyout firm, said India's private equity market may expand as much as 40 percent next year, even as increased competition for stakes drives down returns.

``The private equity market in India will continue to do well even as returns could come down in percentage terms,'' Shankar Narayanan, managing director at Carlyle India Advisors Pvt., said in Mumbai today. The total value of buyout agreements could reach $18 billion next year, he said.

Private equity companies invested more than $4.2 billion in India this year, taking the total value of such funds committed to the nation to $12.9 billion, according to the Asian Venture Capital Journal. India was the Asia-Pacific region's second- largest private equity market in the first half, after Australia, as the value of deals jumped 55 percent.

Executives from Sequoia Capital, 3i Group Plc, Actis Capital LLP and other buyout firms are in Mumbai for a two-day gathering to discuss how to make more profits in India as investments have become more expensive.

Buyout funds have bought Indian listed and unlisted companies on expectation of higher returns as the government forecasts expansion of about 9 percent for the year, maintaining the South Asian nation's position as the fastest-growing major economy after China.

Infrastructure Push

India is building power plants, transmission lines and substations as part of a $500 billion infrastructure plan to spur economic growth.

``I would stay invested in sectors like airports and power over the next three years,'' Anil Ahuja, managing director and co-head, Asia 3i India Pvt., said in Mumbai yesterday.

Buyout companies could invest more than that amount in India next year, amid soaring valuations, raising their bets on the world's second-most populous nation, said Sumir Chadha of Sequoia Capital, the venture firm that made billions of dollars backing Google Inc.

``Most deals are getting done at very high valuations,'' Chadha said. ``There is just so much money chasing deals now.''

A five-year stock rally has made it difficult for private equity firms to realize higher profits in India.

New York-based Warburg Pincus LLC earned about six and a half times its original investment when it sold shares in Bharti Airtel Ltd., India's biggest mobile-phone company, in 2005.

``Returns that we saw in 2003-2004 will be very difficult to replicate next year,'' said Darius Pandole, partner at New Silk Route Advisors Pvt., which raised a $1.3 billion fund to invest in Asia this year. ``The market is hot and investors want to deploy money now.''

Monday, December 03, 2007

India's Economy Expands 8.9%, Slowest Pace This Year

From Bloomberg today:

India's economy grew at the slowest pace since the final quarter of 2006, signaling the central bank may soon end three years of interest-rate increases.

Asia's third-largest economy expanded 8.9 percent in the three months to Sept. 30 from a year earlier, after a 9.3 percent increase in the previous quarter, the statistics office said today in New Delhi. Analysts expected an 8.7 percent gain.

Manufacturing growth was the weakest in seven quarters as higher borrowing costs curbed demand for cars and motorcycles, prompting Tata Motors Ltd. and Hero Honda Motors Ltd. to reduce output. A planned relaxation of foreign-investment rules may attract companies such as Frankfurt airport owner Fraport AG, helping improve India's congested air terminals and shoddy roads.

``Removing bottlenecks is central for India's growth to continue,'' said Maya Bhandari, an economist at Lombard Street Research Ltd. in London. ``India is growing at its potential, its macro fundamentals are solid and you have a situation where companies will put more money there.''

India's benchmark share index gained 1.9 percent to 19363.19 on the Bombay Stock Exchange. The yield on the key 10- year government bond fell 1 basis point to 7.91 percent.

Manufacturing gained 8.6 percent last quarter from a year earlier, easing from a previous increase of 11.9 percent, according to today's report. Electricity output slowed to 7.3 percent from 8.3 percent, while farming rose 3.6 percent after a 3.8 percent gain in the quarter ended June 30.

`Gentle Slowdown'

``The Indian economy is softening but not dramatically so,'' said Robert Prior-Wandesforde, senior economist at HSBC Holdings Plc in Singapore. ``A gentle slowdown is probably exactly what the Reserve Bank of India would like to see.''

The central bank expects growth in the year to March to ease to 8.5 percent after it raised interest rates nine times since 2004. The reverse repurchase rate is now at a five-year high of 6 percent. Inflation was 3.21 percent in the week ending Nov. 17, down from 6.7 percent at the start of 2007.

Higher interest rates have curbed demand for autos and motorcycles, prompting Tata Motors and Hero Honda Motors to delay opening new factories and cut output.

Still, economic expansion in this financial year almost matches the average 8.6 percent growth from 2003, the quickest pace in the nation's history since independence in 1947. That's boosting profits for companies doing business in India.

Coal, Cement

South Africa's Richards Bay Coal Terminal, the world's biggest coal-export facility, expects a 30-fold surge in sales to India this year. Fraport said this month it is aiming to boost activities in ``booming markets'' such as China and India.

With exports accounting for only 23 percent of India's $906 billion economy, Lehman Brothers Inc. expects the South Asian nation to be immune to a deceleration in world growth sparked by mortgage defaults in the U.S.

The International Monetary Fund last month cut its projection for global growth next year to 4.8 percent from an estimate of 5.2 percent in July.

India's pace of growth is almost three times the economic expansion in the U.S. and countries that share the euro, and falls only behind China's 11.5 percent gain last quarter among the world's top 15 economies.

Global producers of cement, steel, copper and other products are benefiting from a five-year $500 billion plan by India's government to modernize and expand roads, ports and other infrastructure.

Foreign Investment

``Despite a slowdown in manufacturing, the sustained rate of investment gives me the confidence that the year will end pretty close to 9 percent growth,'' Indian Finance Minister Palaniappan Chidambaram told reporters in New Delhi. ``With luck, it could even be on the right side of 9 percent.''

The government will next week consider easing foreign investment rules in aircraft maintenance companies, petroleum marketing firms and commodity exchanges, the Economic Times reported. Since assuming office in May 2004, the government has relaxed foreign investments in telecommunications and single- brand retail outlets.

``India is very committed to reforms,'' said Stephen Roach, chairman of Morgan Stanley Asia Ltd. ``I like what I see in India. The Indian economy is really performing very impressively right now.''

Demand in India is also being bolstered by new jobs created by companies such as Cisco Systems and Mahindra & Mahindra Ltd., which are expanding to benefit from local consumer spending.

More Jobs

Cisco Systems Inc., the world's largest maker of computer- networking equipment, plans to triple its workforce in India to 10,000 people by 2010, Chief Executive Officer John Chambers said last month.

Mahindra, India's biggest sport-utility vehicle maker, plans to spend about $1 billion in the next four years to double automobile production.

State Bank of India, the nation's biggest lender, today won government approval for a $4.2 billion share sale, its first in a decade, amid higher demand for mortgage, car and other loans.

The Indian economy has quadrupled in size since 1991, when the Oxford-educated Singh as the finance minister, introduced free-market measures that cut red tape and allowed foreign companies to set up operations locally. That's helped double per capita income in the last eight years.

India May Sustain 9% GDP Growth for a Record 3rd Year

From Bloomberg today:

India's 9 percent economic growth may be sustained for a record third year on prospects of bumper crops and a retreat in crude oil prices, Finance Minister Palaniappan Chidambaram said.

``If harvests are good, we are able to enjoy a bit of luck with crude oil, and we are able to moderate capital flows, which are putting pressure on inflation, we should have 9 percent'' in the fiscal year ending March 31, the Harvard-educated minister said in an interview yesterday in New Delhi.

Chidambaram's prediction came after figures showed the pace of growth slowed in Asia's third-largest economy last quarter amid decade-high borrowing costs. Morgan Stanley's Asia chairman Stephen Roach said the slowdown was temporary, with 9 percent growth in India being ``eminently achievable.''

``I am very optimistic about India over the next three to five years,'' Roach said in an interview in New Delhi. ``The combination of monetary tightening and a higher value of the rupee in the foreign-exchange market can put the brakes on the economy in the near term.''

India's $906 billion economy grew 8.9 percent in the three months to Sept. 30 from a year earlier, after gaining 9.3 percent in the previous quarter, the government reported last week. China's $2.6 trillion economy expanded 11.5 percent in the third quarter.

Foreign Investment

Industry Minister Kamal Nath last month said almost all of India's economy is now open to overseas investment since Prime Minister Manmohan Singh, as the finance minister in 1991 started to dismantle India's Soviet-style controls on industry. Only some defense-related areas and retail remain closed, Nath said.

Since assuming office in May 2004, Singh's government has relaxed foreign investments in telecommunications and single- brand retail outlets. The government will this week consider easing foreign investment rules in aircraft maintenance companies, petroleum-marketing firms and commodity exchanges, the Economic Times reported.

To attract more funds from abroad, India last year enacted a law to enable construction of special economic zones, enclaves modeled on China's Shenzhen. The government also has a five-year plan to attract investments of $500 billion in roads, ports and other infrastructure.

Chidambaram said that while investment will continue to drive India's economic growth, ``there are some risks, such as crude oil prices, over which we have no control.''

Fuel Subsidies

India is Asia's third-biggest oil consumer and imports almost three-quarters of its needs. It hasn't raised fuel prices this year, when oil surged to a record, to protect consumers in a country where more than half the 1.1 billion population live on less than $2 a day. That's adding to an annual $25 billion subsidy bill which could have been spent instead on health, education and other infrastructure.

Crude oil for January delivery fell 9.7 percent to $88.71 a barrel last week on the New York Mercantile Exchange, the biggest weekly decline in two and a half years.

India's agriculture, which makes up a fifth of the economy, depends on the vagaries of the June-September monsoon rains to irrigate crops across the world's seventh-largest land mass.

There were more rains than forecast this season, according to the state-owned weather bureau, improving prospects for a record output of crops from rice to cotton and soybean.

Interest Rates

JPMorgan Chase & Co. and HSBC Group Plc expect more than three years of interest-rate increases by the central bank will also moderate India's expansion. The economy grew 9.4 percent in the year ending March 2007 after gaining 9 percent in the previous 12 months.

``Ex-agricultural growth will continue to trend lower over the next 18 months because of the lagged effects of the tightening of policy conditions, both in the form of a stronger exchange rate and higher interest rates,'' said Robert Prior- Wandesforde, senior economist at HSBC in Singapore.

India's central bank, which has raised its benchmark interest rate nine times since October 2004, on Oct. 30 ordered lenders to set aside more reserves for a fourth time this year to prevent inflows of foreign cash from reigniting inflation and pushing up the rupee, already at a nine-year high.

Global investors, encouraged by India's unprecedented economic growth, have bought $17.3 billion of stocks and bonds so far this year, higher than the previous record of $9.46 billion in 2005.

To check the flood of capital, the Securities and Exchange Board of India, the stock market regulator, on Oct. 25 barred issuance of offshore instruments tied to derivatives. The rupee has gained 11.7 percent against the dollar this year.

``The Indian rupee will retain a strengthening bias over the medium-term owing to robust capital inflows,'' said Siddharth Mathur, an analyst at JPMorgan Chase in Singapore. JP Morgan expects India's economy to grow 8.6 percent in the year to March 31, and 7.5 percent in the following 12-month period.

India's Exports Increase at Fastest Pace in 15 Months

From Bloomberg this morning:

India's exports grew in October at the fastest pace in 15 months as companies filled old orders and used hedging to cope with the impact of rupee appreciation.

Shipments of manufactured goods including gems and petroleum products rose 35.7 percent from a year earlier to $13.3 billion, following a 19.2 percent gain in September, the commerce ministry said today in New Delhi. Imports increased 24.3 percent to $20.8 billion, widening the trade deficit to $7.5 billion from $7 billion a year earlier.

Rising exports may help Prime Minister Manmohan Singh's government achieve its target of boosting India's annual economic expansion to more than 9 percent in the next five years. Singh needs faster growth to generate more employment and reduce poverty in a nation of 1.1 billion people where more than half the population lives on less than $2 a day.

``Companies are now carrying out orders booked earlier, as exporters don't want to lose the market forever,'' said Ganesh Kumar Gupta, president of the Federation of Indian Export Organizations in New Delhi. ``The rupee appreciation is hurting the profitability of the exporters.''

India's currency has gained more than 11 percent this year against the dollar, eroding the value of the merchandise exports which make up about 15 percent of Asia's third-largest economy.

Exports in the seven months ended Oct. 31 rose 21 percent to $$85.6 billion, while imports rose 25.31 percent to $130 billion in the period, widening the trade deficit to $44.4 billion from $32.9 billion a year earlier.

Stronger Currency

The local currency gained to a near nine-year high against the dollar this year and is the second-best performer in Asia, hurting the profits of exporters. The rupee gained as overseas investors, enticed by record economic growth, purchased shares.

Gems and jewelry exports rose 48 percent to $2.16 billion in October from $1.4 billion in the same month a year ago, according to the Gem & Jewelry Export Promotion Council.

``Rupee appreciation definitely has an impact on the export earnings, but we have managed to counter the impact as all our transactions are covered by hedging,'' said Bipin Mehta, chief financial officer of Rajesh Exports Ltd., India's largest producer and exporter of gold jewelry by market value.

Non-oil imports in October rose 28.8 percent to $14.65 billion, while oil imports gained 14.6 percent to $6.12 billion, today's report said.