India's Sub Prime

Joe Leahy in the Financial Times has written about India’s own version of the subprime crisis in the form of rising delinquencies of personal loans and credit card payments.
http://www.ft.com/cms/s/0/c03d934c-f06c-11dc-ba7c-0000779fd2ac.html
Not for the first time, if this snowballs into the kind of crisis that we are seeing in the US, its roots will lie in the excesses of the past 2-3 years. There is a direct link between those pesky calls from barely literate people selling "no income proof-needed" credit cards and "no questions asked" loans and what some banks have now started to mention at least in private. Simply put, some of those loans aren't coming back. Give a 24-year old five credit cards, a credit limit which far exceeds her annual income, and the outcome is a spiral of defaults. The same is the case with loans which were given more against hope than any real repayment capacity. In their eagerness to rope in more customers, banks have been throwing all caution to the wind. It has to catch up some day.

I wrote about it in the Financial Express, 15 months ago:

Boom or bubble
Housing loans are cause for worry
In Greek tragedy, the legend “Nothing to excess” resonates through the tragic life and end of King Oedipus. When a house in a distant suburb of Delhi is priced at Rs 1.5 crore (that’s almost $350,000) and bought by a 30-something couple, thanks to the magic of leverage, it’s time to read the oracle’s words again. Leverage is a double-edged sword. Sure it allows people to buy a multi-crore condominium by putting down just the Rs 10 lakh they have. But when things turn sour the losses are equally amplified. Just a 10% decline in the price of the property would mean that the borrower has lost 100% of his money. A rule of thumb that property America has used is that fair house prices are 125 times the monthly rent. Across Delhi, Mumbai and even the suburbs it’s now closer to 250 times. An unholy concatenation of low interest rates and high growth in income with a consequent impact on the asset value has fuelled this mad rush to acquire property. Interest rates on housing loans for a 20-year tenure have dropped from a high of 13-14% in 2000 to about 7-8% in 2006. The consequence has been a mortgage-driven housing boom. The only agency with little to gain from this bubble, the RBI, in its recent occasional paper stated, “It is alarming to find that real income growth played only a minor role in determining housing prices in India”. Its norms for lending to the real estate sector have been getting stricter. After blocking funding for purchase of land, the central bank has further tightened measures for checking flow of funds from banks to the real estate sector. It has asked banks to ensure that credit disbursed is used only for “productive construction activity.” There’s another worry – the traditional source of home finance – housing finance corporations which are specialized to assess housing-related risk and are more rigorous in their evaluation criteria – have lost market share to Indian and foreign banks. Their share of the market has dropped from 60% of outstanding loans in 1999 to about 35% last year.

If and when this bubble bursts, there won’t be a “soft landing”. And to those confident that this is one bubble that’s going to keep growing, it would be good to remember that unusual events happen more often than one would expect. Any burst of severe volatility could lead to grief for the economy as whole. IMF research reported in the World Economic Outlook indicated that output losses after house-price crashes in developed countries have, on average, been twice as large as those after stock market crashes, usually resulting in lasting recessions. For an economy that has just started on steroids that’s a sobering thought.

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Testing Leaders

Serial job-seeking may not be a way to greatness but much is to be learnt from the mating dance between company and candidate. Interviews and increasingly these days, ‘concalls’ are a great way of picking up the latest buzz words from around the world as well as the latest techniques to test your nerves. At one interview, for instance, I could have sworn that I was asked to pour out the coffee purely to see if my hand was steady (any tremor would have hinted at sustained use of opium at some point in my life). A friend told me that at a meeting for a C-suite position he was constantly heckled and pushed by the HR manager till he finally asked the young whipper snapper if being thrown off the 22nd floor was one of the hazards of his job. Upon which, the sly fellow told him that he was just testing to see his reaction in the face of recalcitrant employees.

But I liked how one company went about hiring a new CEO. Besides the usual dinner and drink routine, they got a couple of the younger managers to meet the incumbent and ask him how he would handle real-life issues they were grappling with. It was an unusual but very effective way of gauging whether he had the leadership skills to handle the job and equally there was a automatic buy–in from the managers since they were part of the process of selecting their new boss.

He Who Laughs Last

Hard hit by the poor performance of its two largest divisions, private equity and corporate real estate, celebrity PE firm Blackstone has posted a 89% fall in its earnings in the final three months of 2007. Last year at the height of the buyout mania, the firm which essentially advises companies to go private, went public. The Chinese government was one of the investors who subscribed to that issue, a move hailed as a master stroke by many. India, they pointed out, had missed a trick by not using its ample foreign exchange reserves, to make similar investment. The Blackstone stock is now down 50% from its listing price. Mandarins of India’s central bank must be having a quiet laugh.

Our Feudal Lords

12% of scientists and 38% doctors in the US may be Indians, but at home our idiom remains stuck in the feudal era. Our political leaders don’t meet people; they “grant an audience” (See extract from DNA newspaper, below). Our business leaders don’t join school kids at a sports meet; they “kindly agree to give away the prizes”, with a boring, long-winded speech to boot. The favors and fawning raj is as ubiquitous as the more reviled license permit raj.
At one large Indian firm, lunch is served by seniority. When our politicians move on the streets, the world has to come to a halt. It doesn’t matter how great your need – you could be student rushing to an exam hall or a pregnant woman racing to a hospital. All wait while our feudal lords stride forth to solve such national crises as attending a venial warlord’s son’s wedding. Indian bosses expect their underlings to squeeze themselves into invisibility when they pass by. And if you think security has anything to do with this, how come it disappears when they need to woo their voters or beg their shareholders to approve their latest corporate fraud.

From DNA Newspaper (Sunday, March 02, 2008)
"Much to the chagrin of UPA ally and DMK boss M Karunanidhi, (Mrs) Gandhi granted an audience to his nephew-turned-foe, Dayanidhi Maran."

Courting Obesity

According to a recent United Nations publication it takes roughly 5 hectares [12.35 acres] of productive ecosystem to support the average U.S. citizen's consumption of goods and services versus less than 0.5 hectares [1.23 acres] to support consumption levels of the average citizen in the developing world. Those gluttonous yanks. But hang on. We are getting there as well and fast. Soon Indian citizens in the top quarter of the pyramid will need the same five hectares to support their consumption needs. For evidence look no further than the average family table at meal times. We eat lots more and many more things. And then struggle to work it off at gyms and spas. But that’s another story. On special occasions, the spreads are mind numbing. Pasta and cheese share table space with sarson ka saag and chettinad chicken. Obesity and attendant miseries lurk at every corner. But we are helpless. Greed and gluttony have a life of their own. Instead of grudging our food-growers the $15 billion loan waiver, we should give them a $15 billion bonus for keeping our waistlines growing.

Why oh Why

After years of writing for a living, it's difficult to keep your mouth shut. Even if someone's paying you for it. In despair I turned to the last refuge of those who may write without any hope of being read. Somewhat like Father McKenzie, who I am beginning to resemble in other ways as well. Once the decision was taken, the exhilaration followed. No holds barred, no one to please, no party line to follow and no deadline either. This is writing bliss.
But some self-imposed rules. No baby talk. No food tales. No poems. No travel tales.And no paens to the past. Such horrors have long assailed my senses as friends and strangers force their outpourings down unwilling throats. The 1-month old creature gurgling in delight as it wets its mama's pants, may be the apple of the lady's eye, but to all others it is an eyesore.
So then what will it be? Everything actually, that I see, observe and feel strongly about. The IPL tamasha as much as the Thackerays' shennanigans. And in between I will squeeze in my take on how the credit excesses of the Americans are being aped with much vigor by our demographic dividends.
But no more promises. Let the Outporiad begin!