Fixed Maturity Plans (FMPs) continue to stay in the news. A number of investors have sought redemptions, even at the cost of having to pay a hefty exit load. Any mention of a real estate paper in the portfolio spooks them. While everyone agrees that risks in the real estate sector have gone up substantially in the recent past, the expectation is that property prices will correct, not that borrowers will default. Default may be the last event in the cycle, after other options have been exhausted, and that includes allowing prices to correct. A default is likely to kill both real estate borrowings from the formal sector, and FMP as a product option. The real estate sector has very few options for short- and long-term borrowings, and defaults will shrink the window that has just opened. While most agree that real estate borrowers may have stretched their borrowings and projects a bit too far, price correction is seen as a plausible option to ease some stress, rather than a straight default that represents a snapping point. If the reluctance to let prices drop persists, default may become inevitable and prices will anyway tumble after that event.
Lose-lose for liquid funds and NBFCs
Along with FMPs and real estate developers, the other groups in stress are the liquid funds and non-banking finance companies (NBFCs). For a long time now, mutual funds have emerged as the dominant providers of short-term finance to NBFCs. Over 90 per cent of commercial paper (CP) issued by this sector is bought by mutual funds. The attractive yield is the bait, apart from the fact that there is an access premium, even for a highly credit-rated borrower. NBFCs do not have access to the markets that mutual funds can access, with retail fixed deposits dying a quiet death in the late-1990s.
The liquidity crunch has led several liquid funds to reduce their exposure to CPs and CDs, and this has triggered a shortage of funds for NBFCs. The proposal to ask NBFCs to raise perpetual debt could not have come at a more inappropriate time, when lenders have shied away from the markets. NBFCs do not have a deposit base, and if their access to wholesale debt market through mutual funds is also cut off, their businesses are likely to come under tremendous stress.
Credit crunch likely to worsen
The credit crunch as we see it is only likely to get worse. Many companies have issued foreign currency convertible bonds (FCCBs) that will begin to mature from next year. And with the conversion prices at a premium to the market prices, the options will not be exercised. Roll-over of debt is likely to be expensive, and money very difficult to come by. India needs long-term debt the most, for its infrastructure and its investments in capacity, apart from being able to sustain and roll over what has already been borrowed. The fact that long-term debt market reforms have been delayed for too long is likely to hurt the most, as we grapple with the situation of conservative savers wanting fixed income products, but eager borrowers unable to tap that market satisfactorily.
USA?s economic woes to continue
The Fed has gone ahead with another rate cut, bringing the Fed rate to 1 per cent, a level below which it may be tough to lower the rate further. Economic data from the US confirms the fears that the slowdown this time is unprecedented in many ways. There has been a 3.1 per cent cut in consumer spending in Q309, the biggest cut since 1980. The cut in non-durable spending has been the sharpest since the 1950s. Disposable personal income dropped by 8.7 per cent ? the lowest since 1947. ?Will US go the Japan way?? That?s the question being asked now. The only difference, it seems, is that the US has managed to bring together most of the central banks to co-ordinate a revival package and rate cut, while Japan mostly battled it alone. The negative news needs to die down first, before we begin to see any signs of revival in any of the markets across the globe.
Policy muddle in telecom
Clarity in policy is something we have sadly not been blessed with. Including Unitech, two bidders of telecom circles have managed to sell their stakes at huge profits to themselves. By paying a licence fee of Rs 1,651 crore, Unitech has managed to get an enterprise value of about seven times that amount, and pocketed over Rs 6,000 crore for its stake sale. Unitech?s gain is clearly the government?s loss as it sold telecom licences and spectrum cheap. If one considers the pre-crisis valuation that Unitech was eyeing, the gains would have been twice that amount. Now we hear that the government is planning to cap the number of operators in every circle to ensure optimal utilisation of spectrum. The Telecom Regulatory Authority (TRAI) and the Department of Telecom (DoT) have always been at loggerheads when it comes to policy, and DoT has customarily overlooked TRAI?s recommendations. As we muddle through changing stances on spectrum, operators, and licences, we hold to ransom an extremely useful service that has so clearly demonstrated its ability to bring economic opportunity within the reach of the broader population.