Views of Mr P. H. Ravikumar, Managing Director, Capri Global Capital Ltd on the Mid-Quarter Monetary Policy: September 2013 announced by RBI Governor Raghuram Rajan

Markets have reacted adversely to the surprise hike in the repo rate by the Governor of Reserve Bank of India in the Monetary Policy announcement today.

The Market expectations of status quo at the worst or a cut in repo rate in my view were clearly part of the euphoria generated from out of the positive developments on several fronts during the last few weeks post the assumption of charge by Mr. Raghuram Rajan as Governor of RBI.

However, the inflation statistics and the food inflation in particular should be of serious concern to all policy makers. I believe the new Governor is sending a strong signal to markets of his unhesitating ability to take unpopular decisions if such decisions are warranted by ground realities. The Governor has sent a strong message so early in his tenure to the market “don’t take me for granted”.

The deferment in withdrawal of quantitative easing by US has given Indian policy makers a breathing space of three months at the least and six months at the best. It is important that key policy decisions to insulate the economy (to the extent possible on final QE withdrawal by US must be taken quickly even if some of these decisions are not popular).

While the tight interest rate out look continues to be on cards in the short run definitely, Reserve Bank of India will need to address the issues of sufficient liquidity in markets given that the busy season is now round the corner. The management of the currency exchange rate is the other major issue which will have to be addressed. Allowing the Rupee to strengthen beyond current levels may not be actually in the interest of the overall economy in general and exporters in particular.

Source: http://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=29590

FSI for all categories of Cessed Buildings increased to 3.00

A decision kept on hold since 2009, the state government on 26^th July 2013 announced that a floor space index (FSI) of three will be extended to all the three categories of cessed buildings (Category A, B and C). The move would certainly make it attractive for builders and developers to offer redevelopment to more than 16,000 cessed buildings.

The move is expected to provide a major boost to plans of redevelopment of such properties.

What are Cessed Buildings?

Cessed buildings - built prior to 1969 - are privately-owned old buildings in South Mumbai whose repair and maintenance are the responsibility of the Maharashtra Housing and Area Development Authority (MHADA). The tenants in these buildings pay a certain cess to the MHADA as owners have found it impossible to maintain the buildings because of low rent income.

Buildings which were constructed before 1940 are categorized as category A cessed building, Buildings built between 1940 to 1950 are categorized as Category B Buildings, and Buildings built between 1950 to 1969 are Category C buildings.

The Bombay High Court has ruled that cessed buildings in the city can be demolished and redeveloped with additional Floor Space Index (FSI) only if can be allowed only if the MHADA certifies the building as 'dilapidated'.

With this categorization Over 12,768 buildings which were constructed before 1940 are categorized as category A cessed building, about 1169 buildings built between 1940 to 1950 are categorized as Category B Buildings, and about 1058 buildings built between 1950 to 1969 are Category C buildings.

Existing Regulation on Redevelopment of Cessed Buildings

Section 33(7) of the Development Control Rules for Mumbai (DCR) lays out that if a cessed building is redeveloped, the developer can get maximum FSI of 2.5 or the FSI required to provide tenements to all the tenants in the building, whichever is more, plus some incentive FSI. The developer then rehabilitates all the tenants in the old building, and sells the extra FSI for his/her profit.

1. In case of redevelopment of 'A' category cessed buildings undertaken by the landlord or Cooperative Housing societies of landlord or occupiers, the total FSI shall be 2.5 of the gross plot area, or the FSI required for rehabilitation of existing occupiers plus 50% incentive FSI, whichever is higher. Under the new policy the developer is assured of at least 50% FSI for free sale. Also the policy enables rehabilitation of all occupants on the same plot, reducing social dislocation. 

2. Self contained flats of minimum 300 sq.ft. (As per Govt. G.R. dt. 2-3-2009, minimum carpet area admissible is 300 sq. ft. in lieu of 225 sq. ft before amendment) and maximum 753 sq.ft. carpet area are given to the old residential tenants/occupants. Shopkeepers are given an area equivalent to their old area. 

3. In case of 'B' category cessed buildings permissible FSI shall be the FSI required for rehabilitation of existing occupiers plus 50% incentive FSI.

3. As per the permissible FSI, stated above, will depend upon the number of occupiers and the actual area occupied by them, no new tenancy created after 13.06.1996 shall be taken into account, while computing the permissible FSI. Similarly, tenants in unauthorized constructions made in the cessed buildings shall not be taken into account while computing permissible FSI, i.e. the total no. of tenants/occupants should not increase after 13.06.1996. The responsibility for rehousing such tenants whose tenancy may have been created after 13.06.96 or who stay in unauthorized construction will lie solely with the NOC holder.

5. Though some buildings may belong to 'C' category (may not belong to 'A' or B' categories), they may be so dilapidated and dangerous that their reconstruction is most urgently necessary to this end, the Government has granted additional incentive FSI as per Point No.1 above for redevelopment of buildings of any category declared as dangerous, prior to monsoon of 1997.

What would change?

After the move to increase FSI for category A cessed buildings to 3.0 times, the state government on 26^th July 2013 announced that a floor space index (FSI) of three will be extended to B and C category buildings (constructed prior to September 30, 1969). Clubbing buildings that were earlier classified as category A, B and C, the state announced on that it would give floor space index (FSI) of 3 to all cessed buildings to boost redevelopment activity in the city.

Chief Minister Prithviraj Chavan, replying to a debate on the issue in the state legislative assembly, said that all categories of cessed buildings will now have an FSI of three.

Developers never paid attention to B and C cessed buildings as only A category buildings used to get that FSI. Many buildings which used to be neglected by developers for want of incentives can now go in for redevelopment.

       

In addition to the above, Fungible FSI of 35% at premium is also applicable to Cessed buildings Redevelopment. The GoM had amended the DCR to enable the tenants to get minimum 300 sq. ft and maximum 753.50 sq ft area flats post redevelopment. As per the modified DCR, the tenants will also be eligible to get further additional area upto 35% as fungible FSI applicable to all sizes of flat. The FSI can be utilized either to provide flower bed, dry balcony, nitch areas or voids or may be used for constructing bigger habitable areas.

Expected impact of the changed regulation

The amendment would benefit more than 16000 families, a majority of lower middle class who live in hazardously wrecked structures mostly in the southern areas of Mumbai. Also Category B, and C buildings which were till now neglected by builders for lack of sufficient commercial incentive would find increased interest for redevelopment. For several years, builders have been reluctant to undertake redevelopment of these buildings as the plots on which they are constructed are small and it was difficult to redevelop with an FSI of 2.5. As a result, residents continued to languish in old structures with the constant fear of the buildings collapsing.

The highest benefit of the amendment has the potential to benefit thickly populated areas of Bhendi Bazaar, Girgaon, Kalbadevi, Grant Road, Tardeo, Byculla, Dadar, Parel, Matunga, Sion, Also some of the Cessed buildings in Bhendi Bazar, Sandurst Road, Grant Road, and Byculla are identified under the category of cluster development and hence, builders are likely to bag FSI of more than 3.0 times Developers have welcomed the move, saying that it will have a major impact. “The hike was needed and it will really bolster the creation of affordable homes in the city,” said Sunil Mantri, chairman, Indian Merchants Chambers (real estate committee).

While housing activists are also happy with the decision, they want the government to look beyond just hiking FSI. “The state should beef up the corresponding infrastructure as only hike in FSI will not serve any purpose, apart from putting a strain on existing resources,” said Utsal Karani, secretary, Janhit Manch.

According to Shadaab Patel chairman and managing director of Platinum Constructions Private Limited, the recent announcement was much awaited move. “There would be creation of more housing stock, which could also result in some price correction,” he said.

However, builders want more such proactive steps.

“The next move should be single-window permissions so that approvals are processed faster,” said Sunil Mantri vice president of the National Real Estate Development Council.

Sources: The Times of India (27^th July ’13), Hindustan times (27^th July ’13), MHADA Website, MCGM Website.

Healthy Sales Environment in Bangalore

The latest PropEquity data suggests that Bangalore saw monthly absorption of Rs 27.4 bn in January and February 2013, the highest level in over 5 years, up 50% yoy. Residential sales growth has been driven equally by volumes as well as pricing with price increases of 22% yoy and a 23% increase in volumes. Given return of price appreciation in Bangalore, we believe proportion of investors is rising, partly driving volume increases.

We believe price increases in Bangalore are backed by demand

We consider recent price hike in Bangalore well justified since: (1) 3 month average transaction price at Rs. 4,070/sqft is still reasonable especially if we compare to Chennai, which is at Rs. 4,340/sq ft. (2) Last 3-yr and 4-yr pricing. CAGR at 11.5% and 8.8% is reasonable with cumulative increase of 39% and 40% respectively. Residential prices in Bangalore remained steady for three years between CY09-11. (3) We find affordability 15% better than last 10-yr average. Going forward, we believe similar affordability level will remain with price increases equaling impact of lower interest rates/income rise.

Key areas of Bangalore: (1) Sarjapur road: This is one of the most active residential hubs of Bangalore, with current prices around Rs. 5,500/sqft; (2) Jaya Nagar: This is an established luxury location with pricing at Rs. 10,000- 12,000/sqft; (3) Southern suburbs: With pricing at Rs. 4,000-4,500/sqft, its an upcoming hub for IT professionals; (4) Rajaji Nagar/Malleswaram. This is an upcoming luxury location with pricing at Rs. 9,000-10,000/sqft; (5) Hebbal: With wide price range of Rs. 4,500-7,000+/sqft, this location is attractive to many investors due to price points and it being in the direction of the airport.

Take away points of Bangalore market

• Value growth driven by mix of pricing and Volumes
• Volume growth remains robust
• Pricing has increased steadily, still affordable
• New launches continue to be steady
• Inventory levels have remained stable

Securitisation and India

Securitisation is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or collateralized mortgage obligation (CMOs), to various investors. The principal and interest on the debt, underlying the security, is paid back to the various investors regularly. Securities backed by mortgage receivables are called mortgage-backed securities (MBS), while those backed by other types of receivables are asset-backed securities (ABS).

In India, securitisation has been for while now, the route to achieving the mandatory priority sector targets for banks both domestic and multinational. Securitisation as a market itself has evolved from being mere sale of portfolio from one organization to another to becoming complex structures in itself. This market has been in existence since the early 1990s, though has matured significantly only post-2000 with an established narrow band of investor community and regular issuers. In the early 1990s, securitisation was essentially a device of bilateral acquisitions of portfolios of finance companies. There were quasi-securitisations for sometime, where creation of any form of security was rare and the portfolios simply got transferred from the balance sheet of the originator to that of another entity. In recent years, loan sales have become common through the direct assignment route, which is structured using the true sale concept. Europe and United States has one of the most complex and developed securitisation market. India is still a small market where securitisation grew 15% over previous year in value terms. The number of transactions was also 32% higher in FY2012 than in the previous fiscal. The number and volume of retail loan securitisation (both ABS – Asset Backed Securitisation and RMBS – Residential Mortgage Backed Securitisation together), was the highest in FY2012 compared to previous fiscals, while the LSO (Securitisation of individual corporate loans or loan sell-off) issuance was the lowest ever. This in reality is an increase in volume—following a continuous decline for three years and was on account of a 26% rise in securitisation of retail loans.

In India, issuers have typically been private sector banks, foreign banks and non-banking financial companies (NBFCs) with their underlying assets being mostly retail and corporate loans.

The key objectives for Indian banks include:

·       Liquidity: Securitisation is an easy route than raising deposits that are subject to reserve requirements

·       Regulatory issues: Constrains arising out of Provisions, priority sector norms, etc.

·       Capital Relief: Major investors are mostly mutual funds (money market/liquid schemes), close-ended debt schemes and banks. Long term investors like insurance companies and provident funds are currently not active due to regulatory constraints. Foreign institutional investors are also missing due to regulatory ambiguity. As per guidelines, mutual funds are required to declare their NAV’s on a daily basis due to which they prefer the structure/asset classes which involve low pre-payment rates. The lack of domestic non-traditional hedge fund style investors to participate in equity and mezzanine tranches has led to originators holding them.

Some examples of securitisation in the Indian context are:

·       First securitisation deal in India between Citibank and GIC Mutual Fund in 1991 for Rs 160 mn

·       India’s first securitisation of personal loan by Citibank in 1999 for Rs 2,841 mn.

·       India’s largest securitisation deal by ICICI bank of Rs 19,299 mn in 2007. The underlying asset pool was auto loan receivables.

·       India’s first mortgage backed securities issue (MBS) of Rs 597 mn by NHB and HDFC in 2001.

·       Securitisation of aircraft receivables by Jet Airways for Rs 16,000 mn in 2001 through offshore SPV.

·       India’s first floating rate securitisation issuance by Citigroup of Rs 2,810 mn in 2003. The fixed rate auto loan receivables of Citibank and Citicorp Finance India included in the securitisation

·       India’s first securitisation of sovereign lease receivables by Indian Railway Finance Corporation (IRFC) of Rs 1,960 mn in 2005. The receivables consist of lease amounts payable by the ministry of railways to IRFC

·       L&T raised Rs 4,090 mn through the securitisation of future lease rentals to raise capital for its power plant in 1999.

An important change negating lot of banks from lending to NBFCs was what we observed in the ‘Master Circular by the RBI for Lending to Priority Sector’ released in July 2011, where loans by banks to NBFCs no longer qualify as Priority Sector Lending (PSL). With this change in regulation there was only one major way in which banks could meet their shortfall in priority sector lending targets, viz., acquisition of compliant portfolios from NBFCs. For the Originators’ (or NBFCs) motive in entering into these transactions was a pricing, capital relief and tenure-matched funding, apart from having an alternate fund-raising channel. This saw a neat rise in transactions involving bilateral assignment of retail loan pools of mainly including loans to Small and Medium Enterprises (SMEs) or Small Road Transport Operators (SRTOs) and micro credit.

These Bilateral assignments which account for around 75% of ABS and RMBS volume in India—continued to be the preferred route relative to conventional securitisation, given that these transactions were not covered by RBI’s guidelines of Feb 2006 on securitisation, thus making them less restrictive for originators.

That no longer is the case according to our internal estimates given that the RBI Guidelines on Securitisation issued in May 2012 that prohibit stipulation of credit enhancement for assignment transactions, thus exposing the purchasing banks to the entire credit risk on the assigned portfolio.

Priority Sector Lending targets however continue to exist and continue to get stricter and larger (MNCs with greater than 20 branches now are treated similar to domestic banks with 40% of their lending portfolio to be to the Priority Sector. And these could going forward be met at-least partly through the securitisation route, wherein credit enhancement is permitted.

Securitisation too is has its own deterrents which are high capital charge for Originators and impact of mark-to-market for the Investing Banks. Another key constraint presently is the ambiguity on the taxation of PTCs (or Pass Through Certificates), a matter which is presently sub-judice. Pending clarity on the issue, Mutual Funds—as well as several banks—are staying away from making fresh investments in PTC instruments. The microfinance industry saw 13% rise in deals involving sale of portfolio through securitisation and other bilateral transactions last financial year.

Last year, sailing through rough waters, the MFI industry managed to strike deals worth Rs 3700 crore (securitisation and direct assignments). This year, the industry is expected to have sold portfolios worth Rs 4,200 crore to banks and other financial institutions, according to data from MFIN (microfinance institutions network).

Additionally, RBI’s expected adoption of the proposals of the Nair committee on Priority Sector Lending (report submitted in February 2012) would be a key regulatory guideline which could further affect the securitization market in India.

We await further guidelines this year from the regulator – this will in addition to the changes in Priority Sector Norms affect the market in totality.