MUMBAI ECON MASALA: CURRENCY FUTURES, CREDIT CARDS AND REAL

UNCLAS SECTION 01 OF 03 MUMBAI 000436

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SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV IN
SUBJECT: MUMBAI ECON MASALA: CURRENCY FUTURES, CREDIT CARDS AND REAL
ESTATE SECTOR

Mumbai Masala, September 9, 2008


1. (U) Table of Contents:

- Currency Futures Trading in India
- Are Banks Feeling the Pinch from the New Restrictions on
Credit Cards?
- Real Estate: New Entrants May Find the Market Tough

Currency Futures trading in India
--------------


2. (U) On 6th August, the Reserve Bank of India (RBI) unveiled
the framework for trading of currency futures in India. These
directives were finalized in consultation with the Securities
and Exchange Board of India (SEBI) and various market
participants. According to the final guidelines, currency
futures can be traded in exchanges recognized by SEBI and will
be governed by the instructions issued jointly by the RBI and
SEBI. Only residents of India and banks authorized by the RBI
(including foreign banks incorporated in India) are allowed to
participate in the currency futures market (Foreign
Institutional Investors are not, however). The market has
trading limits which limit the size of individual positions,
making it difficult for large players to participate. In order
to facilitate market growth and liquidity the RBI is already
considering lifting the limits. (Note: A currency futures
contract is a standardized contract traded on an exchange which
enables investors to hedge against foreign exchange risk. The
holder of the contract agrees to buy or sell a certain
underlying instrument -- in this case an exchange rate -- at a
certain date in the future, at a specified price. End Note.)
In India, currency trading, including forward contracts, is
already allowed in the over-the-counter (OTC) market but
exchange traded currency futures (ETCF) were not permitted.


3. (U) On August 29, the National Stock Exchange (NSE) became
the first Indian exchange to launch ETCFs. To promote
participation in this segment, NSE announced that it will not
levy transaction charges on trades made from August 29 until the
end of September. In a meeting prior to the launch, Ravi
Narain, the Managing Director and Chief Executive Officer of the
NSE, told Congenoffs that the transparent nature of currency
futures market will ensure its popularity. However, he also
pointed out that banks and companies would still likely use
existing structured products for specific needs, despite their
opaqueness. Both the Multi-Commodity Exchange (MCX) and the
Bombay Stock Exchange (BSE) have sought approvals from SEBI to
launch their own currency futures trading platform.


4. (U) Tarun Bhatia, Head-Financial Sector Ratings of Crisil
Ratings, expressed his hope that the NSE would replicate its
success with equity derivatives in the currency futures segment.
He believes that the introduction of currency futures is a
"good step" as it adds dimension and diversity to the market.
The market is prepared to take advantage of this new structured
product, he added.

Are Banks Feeling the Pinch from the New Restrictions on Credit
Cards?
-------------- --------------


5. (U) On July 23, the Reserve Bank of India (RBI) issued a
circular on the credit card operations of banks that tightened
the existing norms that governed credit cards. In this
circular, the RBI advised banks against charging excessive
interest rates on cash advances, including credit cards, and
suggested that each bank prescribe an interest rate cap. RBI
also required banks to provide transparent explanations for the
rejection of credit card applications. They also issued
guidelines on other elements of credit card operations, such as
obliging issuing banks to absorb losses from unsolicited credit
cards, requiring customer permission to share credit information
for marketing purposes, and to put in place a mechanism to
ensure that customers acknowledge the receipt of the monthly
statement.


6. (U) India has become one of the fastest-growing markets for
credit card issuances, keeping pace with the general increase in
consumer spending in India. However, rising credit card
delinquencies have alarmed banks and credit card issuers. Uttam
Nayak, the Country Manager for Visa in India, told Congenoff
that the official delinquency rate is in the 6-7 percent range.
However, he believes that local banks are underreporting their
delinquency numbers and that the true number is about 15
percent. Sanjay Nayar, CEO of Citibank, also expressed concern
about credit card delinquencies, telling Congenoffs that those

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Citibank card delinquencies has risen to over 5 percent, from
less than 2 percent a year ago. He blames this on the
indiscriminate issuance of cards by banks in India as banks
aggressively targeted existing cardholders of competitor banks
for new card issuances.


7. (U) According to Rajiv Sabharwal, Senior General Manager,
Retail Assets and Rural Finance Group at ICICI Bank, banks are
required to report all loans, including credit card usage data,
to Credit Information Bureau India Ltd (CIBIL),India's first
credit information bureau. He also accepted that banks had been
aggressively "selling cards," but this practice had lessened.
He stated that last year, ICICI had accepted about 40 percent of
the total applications received for credit cards, but he
estimated this would slow to about 26 percent this year. Tarun
Bhatia of Crisil, acknowledged that banks diligently reported
credit data to the Credit Information Companies/CIBIL, but that
the existing system did not keep a check on the overall
individual credit limit. He added that banks were using their
own existing database to lure customers to the banks' other
segments/ products like insurance and home loans.


8. (U) Comment: This circular was based on a study undertaken
by the RBI on the credit card operations of banks after the RBI
and the Offices of the Banking Ombudsmen had received a number
of complaints from credit card customers. This report also made
a number of recommendations relating to the recovery of credit
card debts through recovery agents. There have been a number of
recent cases of recovery agents, hired by banks, using
heavy-handed techniques to harass and intimate debtors. With
the rise in the number of disputes and litigations against banks
for engaging recovery agents, the RBI has issued specific
guidelines that must be followed by the banks. With this move,
the RBI has shown that it can be responsive to consumer
protection issues, taking action to intervene in the
fast-growing credit card market to protect credit card users
from aggressive lending practices. End Comment.

The Real Estate Sector: New Entrants May Find Market Tough
-------------- --------------


9. (U) On August 22, speakers at a seminar on "Changing trends
in the Indo-US real estate sector" in Mumbai acknowledged that
real estate asset prices had increased rapidly, driven by pent
up demand for commercial and residential real estate in the
country. Participants also highlighted the fact that such a
rapid increase had attracted new developers, who had quickly
over expanded and were struggling, at least in Mumbai's
downturn.


10. (U) Niranjan Hiranandani, Managing Director at Hiranandani
Group and one of the country's largest builders, explained that
the real estate sector had grown from being a family-owned
business into a corporate and professionally managed industry
over the past few years. He stated that during the last 5
years, the sector had grown at a compounded annual rate of 35
percent, but is expected to slow to 15 percent this year.
Sanjay Dutt, Joint Managing Director, Cushman & Wakefield, said
that of the total real estate demand, almost 35 percent is from
office space, 6 percent comes from the retail segment and the
balance is from the residential sector. The key driver of
demand for office space, accounting for almost 75 percent, comes
from the IT-ITeS sector followed by banking and insurance,
biotechnology, and research and development sector. The last
few years also saw a shift in interest towards Tier-2 and Tier-3
cities. As land values became exorbitant and availability of
land for developing large projects became an issue in Tier-1
cities, developers moved to the Tier-2 and Tier-3 cities. Also
IT-ITeS companies were moving to other cities in search of
cheaper real estate and manpower that augmented the demand in
Tier-2 and Tier-3 cities. In the residential sector, the demand
has increased along with rising disposable incomes and the trend
towards nuclear family rather than joint family arrangement.
Home buyers also sought out integrated townships that offered
commercial, retail, residential, and leisure facilities in one
given area.


11. (U) According to Nipun Sahni, Head of Global Commercial
Real Estate at DSP Merrill Lynch, the real estate sector has
attracted the greatest amount of investment through domestic
capital markets. Out of the USD 22 billion raised through
initial public offerings (IPO) last year, 42 per cent was by
real estate firms. He predicted, however, that investments in
infrastructure could surpass those in real estate as the former
had a more diverse range of investment class. Dropping far more
sharply in the recent downturn than the Indian capital markets
as a whole, the market capitalization of the real estate sector

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has dropped to $30 billion, from its peak of $90 billion in
January 2008; the Bombay Stock Exchange Realty Index has lost
more than 60 percent of its value from its peak. Currently all
realty firms that had issued IPOs in 2007 are trading at
discounts from their issue price, he noted. Jai Mavani,
National Director of KPMG, explained that the valuations of
recent real estate IPOs were based purely on "land banks" - the
value of land owned by the developers - rather than future cash
flows.


12. (U) Dutt continued that India's old and well established
builders, often in the second or third generation of their
business, understood the fundamentals of the real estate market.
However, new players like Lanco, Satyam, Larsen and Toubro who
entered the market to cash in on the booming real estate sector,
were not able to capitalize on their investments due to lack of
experience and declining economics of the sector. He hinted
that as these players got impatient, they would look to sell
out, leading to the survival of a few strong players. "Non-core
players entered this business segment thinking that they would
make a 40-50 percent return on investment (ROI) but given the
current situation they do not see these returns materializing
and hence they will look to exit", reiterated Pritam Chivukula,
National Director at Colliers International. Mavani of KPMG
acknowledged that currently capital was not circulating; there
weren't any exit routes available for investors. Hence he felt
the need for products like Real Estate Investment Trusts (REIT)
and Real Estate Mutual Funds (REMF). These were not moving
forward, as the regulators perceived them to be a "back door
entry" for Foreign Institutional Investors (FIIs). (Note: Press
Note 7 released by the Government of India on the subject of
Foreign Direct Investment (FDI) states that investment in
construction development projects, including housing, commercial
premises, resorts, educational institutions, recreational
facilities, city and regional level infrastructure, townships is
allowed up to 100 percent under the automatic route. However
FDI is not allowed in the real estate business. SEBI released
draft guidelines for REITs in December 2007, but has not yet
given final approval for their launch. SEBI approved the launch
of REMF in May 2008. End note.) He recognized the need for a
sound interest rate and investment regime and a healthy mortgage
market. Hiranandani agreed that RBI's anti inflation regime was
keeping interest rates high and making mortgages more and more
unaffordable. Sahni suggested that the regulator could apply
differential interest rates for home borrowers and other
borrowers or at least further relax the tax liability of a home
borrower.
FOLMSBEE