Nov 7, 2008

Business - Q&A Deepak Parekh

Shobhana Subramanian

Deepak Parekh has never been known to mince his words. He’s upset that so much panic has been created unnecessarily in the money market and feels the media, through irresponsible articles and because of too much publicity on television, is partly to blame. The 64-year-old chairman of Housing Development and Finance Corporation tells Shobhana Subramanian that the economy should grow at 7 per cent but he’s worried about how infrastructure projects are going to be funded in the current capital-scarce environment. Excerpts:

How do you read the liquidity situation?
This is one of the worst liquidity crises we have had but there is absolutely no reason, no justification for India to panic. This has been self-imposed so why is there a lack of trust and confidence? Liquidity is tight for two or three reasons. The government has delayed payments to the oil companies and, as a result, the oil firms have had to borrow that much extra — around Rs 40,000 crore from banks. Also, no Indian bank, operating overseas, is getting a rollover, so banks are remitting money overseas to support their operations there. Third, the central bank is taking money out of the system to support the rupee.

What needs to be done?
The government cannot depend on the banking system to fund their shortfall, oil companies need to be paid on time. Banks need to be adequately funded because they need to lend to companies. Why is the reverse repo rate at 6 per cent when the repo rate is now a much lower 7.5 per cent rather than 9 per cent? We should make it a disincentive for banks to keep money with the RBI. I would say, the reverse repo rate, for a short period of time, should be brought down to 2 or 3 per cent. For most banks, the cost of funds is 6 per cent , so they would rather park the limited money they have with RBI and not take a risk. We have to change the psychology.

Why aren’t banks lending?
There’s a fear psychosis — if I lend, I won’t get it back. That’s why the spread too has gone up. We need much more liquidity in the system; banks are not discounting CDs of all banks, they’re discounting CDs of only some banks. Why are we creating this panic? Banks should discount CDs of other banks — it was such a profitable proposition some time back with the coupon rate at 13 and 14 per cent. No bank is going to default. Even if companies delay payments for some time, we have to live with it, we need to give them some breathing time. The heavens are not going to fall.

Where do you see interest rates headed?
Interest rates have come down worldwide and we need to bring down rates too. For the economy to get going again, rates need to come off by about 100-200 basis points. But before lending rates fall, deposit rates need to come down. At the moment, it appears banks will drop rates by about 50-75 basis points. Also the spread that banks are keeping for themselves has increased because they are scared.

So, will companies push back capital expenditure if money continues to remain expensive?
They already have. Steel companies say steel plants are not viable at current prices and cement manufacturers say they don’t know if demand in India will continue to grow at the rates they had anticipated. Everyone will be going slow on capital expenditure. This is the time when the government needs to spend on roads, ports and so on.

Do you think that will happen?
Unfortunately, the political situation is not really conducive right now because elections are round the corner. Once the elections are announced, then the government will not be able to do too much.

Will consumer demand shrink further if interest rates don’t fall?
Consumer demand is already hurt. I met some hoteliers today and they tell me revenues are already down 20 per cent, despite room rates having been lowered. Occupancies have fallen. They say they’re bringing down rates further.

What is happening in the real estate space?
Every developer I meet tells me he’s slowed down construction and got rid of labour. Builders say international companies that have signed leases with them are backing out, these are being rescinded. So real estate prices have to come down and rates for commercial space will come down much faster. They are already down but will come down further because there are readymade buildings with no occupants. Land prices have collapsed, land is no longer an asset — people don’t want land as a security. Today, there is surplus land, low demand and so those who invested in IPOs and through private equity have lost money. Now that the value of land is probably half of what it was, it’s become affordable so we need to fund developers so that they can start constructing affordable housing. There is good demand for that.

So how will the economy fare?
We’re still going to see 7 per cent GDP growth. Yes, sales for companies may not grow at 30 per cent, but they will grow at 15-20 per cent. Profits may not go up by 20 per cent, but even if they grow 10 per cent or are flat, it will be a good performance. We’ve had four very good years and you cannot expect that kind of growth year after year. We will still be the second-fastest growing economy in the world.

Is there still a growth-inflation trade-off?
Prices of all commodities, including food grains are coming down, so inflation should not be a big concern any longer. Let us ensure we have 7 per cent growth.

Will the rupee weaken further?
I think more foreign direct investment will come in, it’s permanent and sticky capital. We need to be more liberal on FDI.

What do you make of the run on mutual funds?
Why is there a run on mutual funds? Mutual funds have illiquid assets, not bad assets. If you take the debt schemes totalling Rs 300,000 crore, the bad assets would not be even Rs 3,000 crore. So, what are we so concerned about? Yes, there is a mismatch because there are premature withdrawals from the funds and there’s no fresh money coming in. Mutual Funds and NBFCs are an integral part of the system and they needed to be funded.

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