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Viewing cable 08MUMBAI436, MUMBAI ECON MASALA: CURRENCY FUTURES, CREDIT CARDS AND REAL

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Reference ID Created Released Classification Origin
08MUMBAI436 2008-09-09 10:21 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Consulate Mumbai
VZCZCXRO8436
RR RUEHBI RUEHCI
DE RUEHBI #0436/01 2531021
ZNR UUUUU ZZH
R 091021Z SEP 08
FM AMCONSUL MUMBAI
TO RUEHC/SECSTATE WASHDC 6557
INFO RUEHNE/AMEMBASSY NEW DELHI 7805
RUEHBI/AMCONSUL MUMBAI 1703
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHCG/AMCONSUL CHENNAI 1866
RUEHCI/AMCONSUL KOLKATA 1669
UNCLAS SECTION 01 OF 03 MUMBAI 000436 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV IN
SUBJECT: MUMBAI ECON MASALA: CURRENCY FUTURES, CREDIT CARDS AND REAL 
ESTATE SECTOR 
 
Mumbai Masala, September 9, 2008 
 
1. (U)  Table of Contents: 
 
- Currency Futures Trading in India 
- Are Banks Feeling the Pinch from the New Restrictions on 
Credit Cards? 
- Real Estate: New Entrants May Find the Market Tough 
 
Currency Futures trading in India 
--------------------------------- 
 
2. (U)  On 6th August, the Reserve Bank of India (RBI) unveiled 
the framework for trading of currency futures in India.  These 
directives were finalized in consultation with the Securities 
and Exchange Board of India (SEBI) and various market 
participants.  According to the final guidelines, currency 
futures can be traded in exchanges recognized by SEBI and will 
be governed by the instructions issued jointly by the RBI and 
SEBI.  Only residents of India and banks authorized by the RBI 
(including foreign banks incorporated in India) are allowed to 
participate in the currency futures market (Foreign 
Institutional Investors are not, however).  The market has 
trading limits which limit the size of individual positions, 
making it difficult for large players to participate.  In order 
to facilitate market growth and liquidity the RBI is already 
considering lifting the limits.  (Note: A currency futures 
contract is a standardized contract traded on an exchange which 
enables investors to hedge against foreign exchange risk.  The 
holder of the contract agrees to buy or sell a certain 
underlying instrument -- in this case an exchange rate -- at a 
certain date in the future, at a specified price.  End Note.) 
In India, currency trading, including forward contracts, is 
already allowed in the over-the-counter (OTC) market but 
exchange traded currency futures (ETCF) were not permitted. 
 
3. (U)  On August 29, the National Stock Exchange (NSE) became 
the first Indian exchange to launch ETCFs.  To promote 
participation in this segment, NSE announced that it will not 
levy transaction charges on trades made from August 29 until the 
end of September.  In a meeting prior to the launch, Ravi 
Narain, the Managing Director and Chief Executive Officer of the 
NSE, told Congenoffs that the transparent nature of currency 
futures market will ensure its popularity.  However, he also 
pointed out that banks and companies would still likely use 
existing structured products for specific needs, despite their 
opaqueness.  Both the Multi-Commodity Exchange (MCX) and the 
Bombay Stock Exchange (BSE) have sought approvals from SEBI to 
launch their own currency futures trading platform. 
 
4. (U)  Tarun Bhatia, Head-Financial Sector Ratings of Crisil 
Ratings, expressed his hope that the NSE would replicate its 
success with equity derivatives in the currency futures segment. 
 He believes that the introduction of currency futures is a 
"good step" as it adds dimension and diversity to the market. 
The market is prepared to take advantage of this new structured 
product, he added. 
 
Are Banks Feeling the Pinch from the New Restrictions on Credit 
Cards? 
--------------------------------------------- ---------------- 
 
5. (U)  On July 23, the Reserve Bank of India (RBI) issued a 
circular on the credit card operations of banks that tightened 
the existing norms that governed credit cards.  In this 
circular, the RBI advised banks against charging excessive 
interest rates on cash advances, including credit cards, and 
suggested that each bank prescribe an interest rate cap.  RBI 
also required banks to provide transparent explanations for the 
rejection of credit card applications.  They also issued 
guidelines on other elements of credit card operations, such as 
obliging issuing banks to absorb losses from unsolicited credit 
cards, requiring customer permission to share credit information 
for marketing purposes, and to put in place a mechanism to 
ensure that customers acknowledge the receipt of the monthly 
statement. 
 
6. (U)  India has become one of the fastest-growing markets for 
credit card issuances, keeping pace with the general increase in 
consumer spending in India.  However, rising credit card 
delinquencies have alarmed banks and credit card issuers.  Uttam 
Nayak, the Country Manager for Visa in India, told Congenoff 
that the official delinquency rate is in the 6-7 percent range. 
However, he believes that local banks are underreporting their 
delinquency numbers and that the true number is about 15 
percent.  Sanjay Nayar, CEO of Citibank, also expressed concern 
about credit card delinquencies, telling Congenoffs that those 
 
MUMBAI 00000436  002 OF 003 
 
 
Citibank card delinquencies has risen to over 5 percent, from 
less than 2 percent a year ago.  He blames this on the 
indiscriminate issuance of cards by banks in India as banks 
aggressively targeted existing cardholders of competitor banks 
for new card issuances. 
 
7. (U)  According to Rajiv Sabharwal, Senior General Manager, 
Retail Assets and Rural Finance Group at ICICI Bank, banks are 
required to report all loans, including credit card usage data, 
to Credit Information Bureau India Ltd (CIBIL), India's first 
credit information bureau.  He also accepted that banks had been 
aggressively "selling cards," but this practice had lessened. 
He stated that last year, ICICI had accepted about 40 percent of 
the total applications received for credit cards, but he 
estimated this would slow to about 26 percent this year.  Tarun 
Bhatia of Crisil, acknowledged that banks diligently reported 
credit data to the Credit Information Companies/CIBIL, but that 
the existing system did not keep a check on the overall 
individual credit limit.  He added that banks were using their 
own existing database to lure customers to the banks' other 
segments/ products like insurance and home loans. 
 
8. (U)  Comment:  This circular was based on a study undertaken 
by the RBI on the credit card operations of banks after the RBI 
and the Offices of the Banking Ombudsmen had received a number 
of complaints from credit card customers.  This report also made 
a number of recommendations relating to the recovery of credit 
card debts through recovery agents.  There have been a number of 
recent cases of recovery agents, hired by banks, using 
heavy-handed techniques to harass and intimate debtors.  With 
the rise in the number of disputes and litigations against banks 
for engaging recovery agents, the RBI has issued specific 
guidelines that must be followed by the banks.  With this move, 
the RBI has shown that it can be responsive to consumer 
protection issues, taking action to intervene in the 
fast-growing credit card market to protect credit card users 
from aggressive lending practices.  End Comment. 
 
The Real Estate Sector: New Entrants May Find Market Tough 
--------------------------------------------- ------------- 
 
9. (U)  On August 22, speakers at a seminar on "Changing trends 
in the Indo-US real estate sector" in Mumbai acknowledged that 
real estate asset prices had increased rapidly, driven by pent 
up demand for commercial and residential real estate in the 
country.  Participants also highlighted the fact that such a 
rapid increase had attracted new developers, who had quickly 
over expanded and were struggling, at least in Mumbai's 
downturn. 
 
10. (U)  Niranjan Hiranandani, Managing Director at Hiranandani 
Group and one of the country's largest builders, explained that 
the real estate sector had grown from being a family-owned 
business into a corporate and professionally managed industry 
over the past few years.  He stated that during the last 5 
years, the sector had grown at a compounded annual rate of 35 
percent, but is expected to slow to 15 percent this year. 
Sanjay Dutt, Joint Managing Director, Cushman & Wakefield, said 
that of the total real estate demand, almost 35 percent is from 
office space, 6 percent comes from the retail segment and the 
balance is from the residential sector.  The key driver of 
demand for office space, accounting for almost 75 percent, comes 
from the IT-ITeS sector followed by banking and insurance, 
biotechnology, and research and development sector.  The last 
few years also saw a shift in interest towards Tier-2 and Tier-3 
cities.  As land values became exorbitant and availability of 
land for developing large projects became an issue in Tier-1 
cities, developers moved to the Tier-2 and Tier-3 cities. Also 
IT-ITeS companies were moving to other cities in search of 
cheaper real estate and manpower that augmented the demand in 
Tier-2 and Tier-3 cities.  In the residential sector, the demand 
has increased along with rising disposable incomes and the trend 
towards nuclear family rather than joint family arrangement. 
Home buyers also sought out integrated townships that offered 
commercial, retail, residential, and leisure facilities in one 
given area. 
 
11. (U)  According to Nipun Sahni, Head of Global Commercial 
Real Estate at DSP Merrill Lynch, the real estate sector has 
attracted the greatest amount of investment through domestic 
capital markets.  Out of the USD 22 billion raised through 
initial public offerings (IPO) last year, 42 per cent was by 
real estate firms.  He predicted, however, that investments in 
infrastructure could surpass those in real estate as the former 
had a more diverse range of investment class.  Dropping far more 
sharply in the recent downturn than the Indian capital markets 
as a whole, the market capitalization of the real estate sector 
 
MUMBAI 00000436  003 OF 003 
 
 
has dropped to $30 billion, from its peak of $90 billion in 
January 2008; the Bombay Stock Exchange Realty Index has lost 
more than 60 percent of its value from its peak.  Currently all 
realty firms that had issued IPOs in 2007 are trading at 
discounts from their issue price, he noted.  Jai Mavani, 
National Director of KPMG, explained that the valuations of 
recent real estate IPOs were based purely on "land banks" - the 
value of land owned by the developers - rather than future cash 
flows. 
 
12. (U)  Dutt continued that India's old and well established 
builders, often in the second or third generation of their 
business, understood the fundamentals of the real estate market. 
 However, new players like Lanco, Satyam, Larsen and Toubro who 
entered the market to cash in on the booming real estate sector, 
were not able to capitalize on their investments due to lack of 
experience and declining economics of the sector.  He hinted 
that as these players got impatient, they would look to sell 
out, leading to the survival of a few strong players.  "Non-core 
players entered this business segment thinking that they would 
make a 40-50 percent return on investment (ROI) but given the 
current situation they do not see  these returns materializing 
and hence they will look to exit", reiterated Pritam Chivukula, 
National Director at Colliers International.  Mavani of KPMG 
acknowledged that currently capital was not circulating; there 
weren't any exit routes available for investors.  Hence he felt 
the need for products like Real Estate Investment Trusts (REIT) 
and Real Estate Mutual Funds (REMF).  These were not moving 
forward, as the regulators perceived them to be a "back door 
entry" for Foreign Institutional Investors (FIIs).  (Note: Press 
Note 7 released by the Government of India on the subject of 
Foreign Direct Investment (FDI) states that investment in 
construction development projects, including housing, commercial 
premises, resorts, educational institutions, recreational 
facilities, city and regional level infrastructure, townships is 
allowed up to 100 percent under the automatic route.  However 
FDI is not allowed in the real estate business.  SEBI released 
draft guidelines for REITs in December 2007, but has not yet 
given final approval for their launch.  SEBI approved the launch 
of REMF in May 2008.  End note.)  He recognized the need for a 
sound interest rate and investment regime and a healthy mortgage 
market.  Hiranandani agreed that RBI's anti inflation regime was 
keeping interest rates high and making mortgages more and more 
unaffordable.  Sahni suggested that the regulator could apply 
differential interest rates for home borrowers and other 
borrowers or at least further relax the tax liability of a home 
borrower. 
FOLMSBEE