Any first-hand reports from the trenches? http://www.iht.com/articles/2008/10/23/business/rupee.php
Credit crunch ensnares India By Jeremy Kahn Thursday, October 23, 2008 NEW DELHI: The showroom at Uppal Motors, a Honda motorcycle dealership not far from here in an upscale satellite city of India's capital, is usually packed with customers this time of year. It is the week before the Hindu festival of Diwali, a time when many Indians traditionally purchase gifts and more costly items. But only a comparative trickle of customers have shown up. Sales are down 10 percent, said Virender Uppal, the dealership's owner, and the reason is that India, like many other countries, is going through its own credit crunch, too. Throughout India, businesses have been grappling with a lending squeeze even though the country had little exposure to subprime lending or troubled Western financial institutions. India is feeling the effects of the global financial crisis but its liquidity crunch has been compounded by a combination of local factors as well. The call center workers and software programmers Uppal normally sees in his showroom could afford to buy a new motorcycle, he said, if only the banks would lend to them. "They cannot meet the terms and conditions of the bankers," he said. "Money is not being extended to them." Five finance companies once had sales representatives right inside Uppal's dealership, ready to help customers arrange instant credit. But three of them, including the Indian arms of Citigroup and GE Capital, recently shuttered their counters. Those still offering credit have imposed stringent new standards: they want buyers to own a residence; have held their current job for at least a year; and have plenty of money in the bank. And they now insist on a down payment of as much as 40 percent, up from 20 percent. India's financial sector breathed a sigh of relief last week after the country's central bank took a series of steps to ease a liquidity crunch that pushed overnight interbank lending rates over 20 percent. But the trouble for the country's once-booming economy may be just beginning. Foreign institutional investors, many desperate for cash to cover margin calls and redemptions at home, have been pulling money out of India throughout the year. Since January, foreign investors have taken $11 billion out of the Indian market, which has lost 50 percent of its value over the period. This wave of selling accelerated over the past month as markets in the U.S. and Europe plunged. The pull-out of foreign money, combined with fears that slowing Western economies would drag down Indian growth, have resulted in some of the worst one-day declines in India's benchmark Sensex stock indicator since the country's 1990 financial crisis. The rapid exit of foreign capital has also resulted in a precipitous decline in the rupee, which slid to its lowest level against the dollar in six years. It was trading Thursday at 49.8125 rupees to the dollar. The Reserve Bank of India, the country's central bank, has revealed that it has spent at least $8 billion to buy rupees in the market in an attempt to moderate the currency's fall. While the central bank has no declared exchange rate target, analysts said they suspected the bank has an informal goal of trying to keep the rupee from trading at more than 50 to the dollar. So far, India's foreign currency reserves have been adequate to weather this storm. The country's total reserve assets declined about 7 percent from August, to $274 billion in the second week of October, the last period for which figures are available. While that pales in comparison to the $1.9 trillion that China, the other emerging Asian giant, has amassed, economists said it was more than adequate to cover India's debt obligations. "India from a macro point of view is not that exposed to foreign debt," said Seema Desai, an analyst with the Eurasia Group in London. Desai noted that India's reserves were greater than those of Brazil and far exceeded those of the emerging economies in Eastern Europe, that have found themselves in deep trouble during the recent crisis. Still, bond rating agencies downgraded India's sovereign debt this summer to near junk status as the country faced a yawning fiscal deficit and spiraling inflation. India's bonds traded lower at the start of October, but have recovered in recent days. The central bank must walk a fine line between defending the rupee and the fear that its own rupee purchases will take cash out of a system that is already suffering from a severe credit crunch. In the past two weeks, the central bank has pumped an estimated $21 billion into the banking system. The move helped dial back the rates banks were charging one another for overnight loans to 7 percent. The central bank also offered some $4.1 billion to the country's mutual fund industry through a special 14-day auction. In addition, the Indian securities regulator has allowed mutual funds to borrow from their foreign arms and, in two cases, to exceed existing limits on borrowing against assets. India's banks had little exposure to troubled credit derivatives or the international banks that owned them. Crisil, an Indian ratings agency, estimates that only 6 percent of the country's banking assets are held abroad and that the country's exposure to troubled overseas financial companies is no more than $1 billion. India's banks also meet international capital requirements. But a host of factors combined to severely limit available credit in the banking sector. Earlier this year, the central bank tightened the money supply, raising interest rates and increasing mandatory reserve ratios for banks, in attempt to curb inflation. On top of this, India's state-owned oil companies were recently required to tap the banking sector to finance purchases of crude oil because the government had not yet issued bonds to help pay for these purchases. India imports 75 percent of its petroleum and the government heavily subsidizes retail fuel prices. Then came the rapid exodus of foreign capital and the Reserve Bank's own rupee purchases to shore up the flagging currency, which further constrained money available for lending. "Liquidity had disappeared," said Chanda Kochhar, joint managing director of Icici Bank, India's largest private lender. "It was not as if that brought the system to a standstill. But one should not have a system where this would continue." Among Indian banks, Icici has been the worst affected by the worldwide crisis, which has required the bank to fight a flurry of rumors that it was in danger of collapse. To stem the panic, the central bank took the unusual step of announcing that it had examined Icici's balance sheet and found the bank to be well capitalized, with sufficient cash to meet depositor demand. It also said it stood ready to support Icici with additional funds if necessary. Icici has India's largest exposure to the U.S. financial sector, with about $650 million invested in American banks, mostly through Icici's British arm. And in September, the bank announced that it stood to lose about $18 million after Lehman Brothers filed for bankruptcy protection. But Kochhar said the bank's losses were tiny in comparison to Icici's $100 billion balance sheet and noted that the bank maintains a risk-weighted capital adequacy of 13.4 percent, a measure of its ability to handle risk, well above the international standard of around 8 percent to 10 percent and in excess of what Indian regulators require. While the immediate threat to India's banking system seems to have passed, the country's economy is bracing for the effects of a worldwide economic slowdown. India has the cushion of a huge domestic market, 1.2 billion people strong, but its once white-hot growth was cooling even before the current crisis. The Indian economy expanded at more than 8 percent for the past three years, making it the fastest growing country in the world after China. But this year projections are that growth will fall below that figure, perhaps by a significant margin. So far, India's airlines have been among the hardest hit companies. Several Indian carriers have defaulted on their fuel bills and the largest airlines are struggling to shed staff in a country where laws and labor unrest make laying off workers very difficult. India's export-driven service sector is also anxious. Already, Infosys and Satyam, two well-known outsourcing companies, have told investors they expect weaker earnings as their customers in the United States and Europe pull back. Meanwhile, import-intensive industries will be hit by the rupee's fall, which makes the cost of goods from overseas more expensive. But perhaps the biggest concern is India's infrastructure projects. To compete with China and other big emerging nations, the government has been planning to pour billions in the coming five years into new roads, ports, airports, and power plants - much of it with the help of foreign financing that may no longer be available. "How much can be achieved," asked Roopa Kudva, chief executive of Crisil, the rating agency, "because of government budget pressure and the drying up of foreign funding?"
