Soft handshake

Maruti's VRS will not have a dramatic impact on profitability

Maruti's voluntary retirement scheme (VRS), which closed earlier this month, got a rather decent response. By the end of it, 1251 employees, or 27 per cent of Maruti's workforce, opted for the VRS. Maruti's employee strength now stands at 3,355 employees.

Just about two years ago, Maruti had over 5,600 employees on board. With sales growing at a healthy pace on the one hand, and employee count going down on the other, Maruti's productivity per employee is clearly going to see an upswing.

Additionally, the company had struck a deal with its workers' union last month relating to the salary structure. With the new salary structure, the company's allowances and perks will now be aligned with market practices. Importantly, the new pact cuts the annual salary hike from 9 per cent currently to 3.5 per cent till 2008.

Needless to say, these two developments will have a positive impact on the company's profitability. But employee costs in the six months till September were less than three per cent of sales. Although this will reduce further, the impact on overall profitability will not be dramatic.

Nevertheless, Maruti will have huge cost savings because of some other factors. The waiver of royalty by Suzuki on old models that are Euro-II compliant is expected to result in savings of over Rs 60 crore annually in the next two years.

Further, Suzuki has also agreed to give a 10 per cent discount on components imported by Maruti, which will also result in gains of well over Rs 60 crore. Maruti also commissioned an aluminium foundry in October to produce machined aluminium castings such as aluminium cylinder blocks, transmission cases and cylinder heads, all of which were earlier imported from Suzuki. This is expected to bring in savings of around Rs 70 crore annually from FY05. Besides, restoration of CNG supplies to the company is expected to result in annual savings of Rs 40 crore in FY05.

In summary, one can expect huge cost savings from Maruti in the near-term, and with sales also growing at a brisk pace, earnings growth is going to be huge.

Whither home loan rates?

Union Bank of India and Indian Bank's Association chairman V Leeladhar's raising housing finance interest rates seems to be the outcome of the recent Bank Economists' conference, where RBI officials had cautioned against irrational exuberance in housing finance, on the one hand, and the need to lower interest rates to the agricultural sector, on the other.

It's significant that Leeladhar also took the opportunity to reduce loans to the agriculture and small scale sector at the same time. With NPAs on account of housing loans being reportedly less than 1 per cent in Union Bank, there seems to be no other reason for having taken these steps.

The big question, of course, is whether the big players in the housing finance sector will follow suit. The cat was set among the pigeons by the Oriental Bank of Commerce chairman's remarks at the conference that his bank's incremental NPAs on account of housing loans was as high as 2 per cent, while the bank had assumed an NPA level of 0.5 per cent while pricing housing loans.

He added that in many instances documentation had been faulty and no legally enforceable mortgage had been created, with the result that such cases the loan was a clean one, i.e. without any collateral.

Other, more aggressive banks will run the risk of even higher incremental NPAs. Under these circumstances, raising housing finance rates may seem to be a logical decision.

Or does it? At bottom, the issue is one of liquidity. Amounts tendered by banks at the daily repo auctions have consistently been above Rs 20,000 crore for weeks, indicating the massive overhang of liquidity in the banking system. The pace of non-food credit offtake, which had risen smartly in September and October, turned sluggish once again in November, when noon-food credit increased by only Rs 4986 crore.

On the other hand, deposit growth has been very high in November. The upshot is that banks have plenty of funds with them, and, short of putting them in repos, retail lending is the only avenue left for deployment. Raising interest rates on housing loans in such a competitive environment is therefore a sure-fire way to reduce profits.

Perhaps banks need to go the HDFC way, putting in place the right processes before lending. Savvy bankers know that in spite of all the talk of housing loans being fully collateralised by the mortgage, in practice it would be extremely difficult to enforce a mortgage when the borrower lives in the house. Hence the need for alternative securities, such as guarantors.

With Contribution from Mobis Philipose