Credit card woes, execution risks and more - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Credit card woes, execution risks and more

Jun 26, 2008

Problems - not just for the credit card holder
If you were thinking that by raising interest rates, the Reserve Bank of India (RBI) is only trying to get stricter with credit card holders, think again. Banks looking to get into the credit card business in association with non-banking companies are in for a struggle with the Indian banking regulator frowning on such alliances. This is particularly after the country's second largest credit card issuer SBI Cards - a joint venture of SBI and GE Money, accumulated huge non-performing assets (NPAs). According to the RBI, a bank partnering with non-banking companies for credit card ventures is not acceptable as it is important that a banking regulator regulates the JV partner. Earlier this year, the RBI rejected PNB's proposal to float a credit card JV with insurer American International Group (AIG) and Venture Infotek, a third-party processor for credit card companies.In the previous fiscal, an aggressive customer acquisition drive had taken its toll on State Bank Of India (SBI) Cards, with defaults rising to possibly the highest in the industry. The JV with GE Money, the Indian subsidiary of General Electric Co., a conglomerate that is also the world's leading consumer finance firm with more than US$ 200 bn in assets, ran into trouble with lack of consciousness of the unregulated partner. SBI Cards, which has so far issued about 3.5 m credit cards, posted a net loss in FY08, its first since 2003, wiping out a substantial portion of its net worth. Also, at the end of FY08, its NPAs stood at 16.3%, the highest among all credit card issuers in India. This justifies the regulator's apprehensions with regard to such JVs, particularly at a time when the high interest rates are making credit card dues a problem not just for the borrower, but also for the lender.

  • Also read - Is the RBI's justified in raising CRR and repo rate?

    Un'real' growth
    In June 2005, India's largest real estate company, DLF, bought a 17.5-acre mill land in suburban Lower Parel for Rs 7 bn and announced a futuristic retail-cum-entertainment centre. This project, which was earlier expected to be completed by the end of 2008, is unlikely to be over before 2010. Similar have been the fates of the projects initiated by the Kohinoor Group and the Piramal Group, both of which were acquirers of mill lands in 2005.

    These are just three examples of high-end luxury realty projects announced by the country's biggest property giants that are behind schedule. According to industry estimates, around Rs 80 bn of real estate projects covering over 40 m square feet are facing delays. With the cost of the projects having doubled in the last three years owing to the rise in input and construction costs, real estate developers are finding it difficult to execute their plans. Steel and cement prices, which are the main components in property projects apart from labour, have risen nearly 50% since December 2005.

    Further, the red tapism has also added to woes in the realty sector. In Mumbai alone, developers need to obtain 56 approvals from the environment and forest department, pollution control board and others, which often take over a year. Predominantly in the mill land's case, some of the earlier approvals were recently revoked with retrospective effect, causing further delays.

    As the execution risks come to the fore, they have already had a sobering impact on the real estate prices, which are expected to take a further hit once an additional estimated space of approximately 15.4 m square feet in the suburbs get added to the supplies by the next fiscal.

  • Also read - What's taxing real estate companies?

    Billion-dollar 'taste of India'
    Gujarat Co-operative Milk Marketing Federation (GCMMF) popularly known by its brand name 'Amul' has become India's first billion-dollar co-operative unit after touching a turnover of Rs 53 bn in FY08. Registering a growth of 23% YoY in sales, the apex marketing body of 13 district milk unions of Gujarat having a membership of 2.7 m milk producers, has reached another milestone by processing almost 10 m litres of milk in a single day. Amongst its products, sales of Amul milk pouches (up 48% YoY) and ultra-heat treated (UHT) milk (sales up 60%) were the biggest contributors to growth.

    The cooperative society has suggested that in order to maintain its profitability, it should be offered a level playing field against the MNCs. That is, if the exporting country is subsidizing their milk product exports, corresponding import duty should be imposed so that Indian farmers have level playing field.

    It has also suggested that India must put in place an effective buffer stock mechanism for dairy commodities alongside proper management of demand and supply equation for milk products. Today, being the largest milk-producing nation in the world, India is also self-reliant in terms of milk products. The secret of GCMMF's success is attributed to its policy of supporting farmer owned organisations and giving them all their dues. Recently the World Bank has also initiated to replicate Amul's model in African countries for their co-operative dairy development.


  • Equitymaster requests your view! Post a comment on "Credit card woes, execution risks and more". Click here!

      

    More Views on News

    Will Blackstone Group Manage L&T Mutual Fund's Assets Successfully? (Outside View)

    Oct 22, 2020

    PersonalFN explains whether Blackstone will be able to successfully manage L&T mutual fund's assets in the event of a potential acquisition.

    Your "I Was There" Moment in History Could Be Today...Don't Miss It (Profit Hunter)

    Oct 22, 2020

    The last time such a moment showed up in history, few investors grabbed a 65 bagger.

    An Update for Those Looking to Trade Crude Oil and Natural Gas (Fast Profits Daily)

    Oct 21, 2020

    Trading crude oil and natural gas in the near future will be challenging. Here's why...

    Will Pharma and Healthcare Funds Improve the Health of Your Portfolio? (Outside View)

    Oct 21, 2020

    The COVID-19 pandemic has turned to be a high-growth opportunity for India's Pharma and Healthcare Sector.

    It Makes Perfect Sense to Look at Defence Stocks Now (Profit Hunter)

    Oct 21, 2020

    India's recent defence push might just be the start of big things in this space. Here's why...

    More Views on News

    Most Popular

    My Latest Stock Recommendation (Fast Profits Daily)

    Oct 9, 2020

    How I picked an exciting stock using trends from both the commodity and equity markets.

    The 'Seedhi Baat, No Bakwaas' View on ITC (Profit Hunter)

    Oct 12, 2020

    Is ITC an investment or a speculation at current levels?

    One of the Best Investment Opportunities in the Market Right Now (Fast Profits Daily)

    Oct 16, 2020

    The one sector that you should be looking at to make good profits.

    The Inflection Point for Defence Stocks is Getting Closer (Profit Hunter)

    Oct 9, 2020

    Few Indian defence companies could use their engineering capabilities to eventually become global leaders.

    More

    Covid-19 Proof
    Multibagger Stocks

    Covid19 Proof Multibaggers
    Get this special report, authored by Equitymaster's top analysts now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Oct 22, 2020 02:56 PM

    MARKET STATS