'Is the end of the credit crisis in sight?'

The availability of funds has eased somewhat but the approach remains cautious and credit is confined to large and quality borrowers.

BHARAT BANKA
MD & CEO, Aditya Birla Private Equity

'The renewed focus of the RBI on growth and the latest IIP data coupled with social spending could mean liquidity getting back into the system'

The rains in cities of Mumbai or London are perfect metaphors for the liquidity situation in the last year or so. Now you see it, now you don’t! You see clouds and hope it rains but it doesn’t while you leave home without umbrella on a sunny day and it pours. Since beginning of 2009 and more so in the current fiscal year an all-around improvement in the liquidity is seen within the system. The availability of credit and affordability has eased with higher credit disbursals since April although the approach remains cautious and credit is confined to large and quality borrowers. Another trend is easier local debt markets on shorter-range of 1-2 years with reduced credit spread although the outlook for the 3-5 year range and beyond remains challenging. That’s positive against late 2008, when Libor ceased to be a benchmark with banks quoting spreads of 700-1,000 bps over undefined ‘cost’. That is, if banks chose to quote at all.

The external market indicates similar trend of a slow opening up with reduction in spreads but is again confined to quality credit and shorter-range debt. In line with this, FII action on the debt side is less encouraging with outflow of $1.3 billion in 2009. This is understandable given the backdrop of lower interest rates and a stronger dollar till late May. One hopes it isn’t a trend that lasts considering the huge amounts required for infrastructure.

On equities, FIIs started investing in March and the trickle of inflows became a barrage by end-May. FIIs are now net investors of $4 billion in 2009 against net outflow of $12 billion in 2008, stellar! Net outflow of $1.4 billion in Jan-March 2009 was neutralised in April while May alone saw inflows of $4 billion, that is, $1 billion a week! While Qualified Institutional Placements (QIP) in realty coming close to $2 billion is encouraging, its expansion to a wider spectrum of sectors and companies needs to be seriously watched.

The anticipated change in rules for insurance, retail, telecom, defence, etc. could bring FDI inflows — these were quieter at $25 billion in 2008-09 against $27 billion in 2007-08 — back on track. The continued positive trend in FII flows with resurgence in FDI could improve domestic liquidity further. The continued interest of FIIs and the liquidity with domestic mutual funds and insurers could translate into absorption of the upcoming supply of paper to the tune of $8-10 billion from disinvestments, QIP issuance and IPOs that may follow disinvestment IPOs.

The renewed focus of the RBI on growth and the latest IIP data hints at a launch-pad being readied for infrastructure spending post-Budget and higher credit disbursals to ensure construction activity is not starved of liquidity. This, coupled with social spending, could mean liquidity getting back into the system multifold and acting as a counter to government borrowings that might exceed its target.

The global developments though warrant a cautious outlook. British sovereign debt is on the verge of a downgrade while the bloating deficits, public debt and huge printing of currency across US and Europe may cause volatility in local interest rates and currencies. This could have a rub off on emerging markets although less serious than last year.

So, keep the champagne ready although you should wait a while before popping the cork.

A SUBBA RAO
Group Chief Financial Officer, GMR

‘The alarming fiscal deficit should be bridged with massive monetisation of government investments and assets instead of resorting to market borrowings’

Life seems to be changing again for the better with the same swiftness with which it plunged into the abyss. Money is flowing again although it is difficult to say what is contributing to this positive trend. Equity markets are rocking again, giving hope to businesses that their days of credit shortage are over. All reports indicate that global investors are beginning to flex their muscle again.

The trillions of dollars that are being printed by various governments across the world have probably started to lubricate the global financial system, readying it for action again. The risk-aversion of lending institutions is giving way to a (very small) appetite for risk once again. With optimism gradually returning to the global lending desks, credit spreads are showing signs of softening.

Contravening the view that India is decoupled from the global financial system, the sub-prime crisis has shown us that this is not the case. Indian businesses, too, have gone through a scorching experience. However, we seem to have overcome this crisis quicker thanks to a number of factors.

Among these are the strengths of the Indian banking system, the aversion of the people to large borrowings, reliance on exports to provide employment to our people and timely measures taken by Indian companies. These include prioritisation of funds deployment, cost controls along with help from the government which reined in galloping interest rates.

Now, the Sensex and Nifty are rebounding again. The return of a stable government has helped this upturn. The success of some recent Qualified Institutional Placements (QIPs) — Unitech, India Bulls and PTC — and block sale of equity by some companies (DLF, Suzlon etc.) is setting the stage for a host of other companies to raise capital. Many QIPs and Initial Public Offers (IPOs) are believed to be in the pipeline. The lending rates have come down steadily from 14-15 per cent to 11-12 per cent.

With falling interest rates on fresh deposits, the cost of funds for banks is set to roll southwards, thus paving the way for the further reduction in the lending rates. With no significant casualties in the corporate sector, banks are becoming more confident to lend as the risks of non-performing assets recedes. The abundant liquidity in the system coupled with the slowing credit offtake is also aiding the return of normal lending activity.

India should swiftly use these unfolding advantages to push for growth. The alarming fiscal deficit should be bridged with massive monetisation of government investments and assets instead of resorting to market borrowings. Credit costs should be brought down further by suffusing the system with more liquidity.

All-round reforms should be hastened to open the flood gates for inward capital flows to propel the GDP to double digit growth. Capital formation should be accorded the highest priority through rapid infrastructure development. A stable and progressive government is a blessing for India but it has to act quickly. We have a make or break period in front of us.