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Cars can’t be treated as luxury products, taxed heavily, says the auto major’s chief

Off lane: It is illogical to relate overproduction with slowdown, says the Maruti Suzuki chairman. Kamal NarangKamal Narang

Citing increases in road taxes by various States as one of the main reasons for higher car prices, making them unaffordable, Maruti Suzuki chairman R.C. Bhargava said that cars cannot be treated as luxury products capable of bearing any level of taxation.

“I think the most important thing is [to understand] why there is a slowdown. Why have customers stopped buying cars like they had been buying before? One part of it is the financial aspect; and to some extent, because of the intervention by the Centre, that is beginning to change... the attitude of the banks has certainly become much more favourable... But the price problem still remains. To a large extent, it is because in the last few months, nine States added substantially to road tax,” Mr. Bhargava said.

These States, including Bihar, Punjab and Kerala, have raised road taxes leading to an increase ranging between ₹5,000 and ₹57,000 in the on-road prices of cars.

“State governments have to realise that this industry is unable to bear this kind of heavy taxation; in many cases, the officers concerned seem to think that car is a luxury product capable of bearing any amount of taxation. It isn’t, as we have seen now,” he said.

“We are selling 3-3.5 million cars; we want to go to 5-10 million, how do you do that if the price goes beyond the reach of people? You cannot get growth in the manufacturing industry, especially in a poor country like India, if the price of the manufactured product is not kept within the reach [of mass buyers],” he said. He added, “It’s not in my hands if somebody else is making a major addition to the cost.”

On arguments that over production by automakers had resulted in the slowdown in the sector, Mr. Bhargava termed them ‘absurd’.

“It is not logical to relate the two. How does overproduction lead to a fall in demand from customers? You have seen every manufacturer declaring non-production days to cut down on production. It doesn’t do me [or] the dealer any good to have cars and inventory. So, if anyone thinks that we produce cars for the fun of producing cars, they have different ideas of how business runs.”

On long he expected the slowdown to stretch, he said, “I don’t know. But if I was to make what would, at best, be a guess, we should start seeing a change in the coming months and the next year should be much better.”

Banking regulator may mandate anchor rate

After mandating banks to implement external benchmarking for retail loan pricing, the Reserve Bank is now looking at the loan pricing regime of non-banking finance companies to make the practice more transparent.

According to sources, the central bank is internally discussing the loan pricing mechanism of the non-banking sector. At present, there is no anchor rate for NBFCs, similar to banks, that is linked to the lending rate of a particular loan.

For example, banks have the marginal cost of fund based lending rate (MCLR) — the anchor rate — and all the loans are linked to such a rate. Earlier, the base rate acted as an anchor rate.

Banks were not allowed to lend below the base rate or the MCLR rate. Banks are allowed to add a spread, based on the risk assessment, to the anchor rate.

However, there is no such mandate for NBFCs to have an anchor rate to which all the loan rates are linked.

“There is no anchor rate for NBFCs.

“So, first, we have to see how they are pricing loans,” sources said, adding it would take some time before mandating an anchor rate for NBFCs.

Unresponsive to changes

It has often been noticed that lending rates of banks and NBFCs, including housing finance companies, are not responsive to changes in the RBI’s policy rate or the repo rate. As a result, the banking regulator has now mandated banks that floating rate retail loans for homes, vehicles and loans to small and medium enterprises should be linked to an external benchmark like repo rate or Government of India T-bills, for example.

The main objective behind linking loans to an external benchmark was for faster transmission of monetary policy rates, particularly in a declining interest regime. At the end of September 2018, the number of NBFCs registered with the Reserve Bank of India declined to 10,190 from 11,402 at the end of March 2018. Only a handful of large NBFCs are supervised by the banking regulator.

The consolidated balance sheet of NBFCs expanded in 2017-18 and also in 2018-19, helped by strong credit expansion. The profitability of NBFCs improved on the back of fund-based income, low NPA levels relative to banks and strong capital buffers, RBI had observed in a recent report.

Banking regulator still has concerns over fixed-cum-floating rate loans

Cautious stance: RBI feels borrowers may find it difficult to service loans once normal rates take effect.Reuters

State Bank of India’s (SBI) plan to offer fixed-cum-floating home loan rates — known as teaser loans — is likely to hit a regulatory hurdle as the Reserve Bank of India (RBI) is uncomfortable with such products.

Teaser loans are those which charge comparatively lower rates of interest in the first few years after which the rates are increased.

During a recent media interaction, SBI chairman Rajnish Kumar said the bank will engage with the RBI for the product which will bear fixed interest for about 10 years and then, turn floating. There is no fixed rate home loan product in the market though there is demand for such a product, and a fixed-cum-floating rate product could have addressed that demand.

According to sources, the RBI is of the view that some borrowers may find it difficult to service the loans once the normal interest rate, which is higher than the rate applicable in the initial years, becomes effective.

In addition, a bank, while extending the loan, does not take into account the borrowers’ repayment capacity after lending rates increase.

While such teaser products are not banned by the regulator, the standard asset provisioning requirement is higher for such loans. For normal home loans, the standard asset provisioning is 0.4% but for teaser loans it is 2%. RBI had increased the provisioning by five times for such loans since these loans are perceived as more risky.

Following the introduction of higher risk weights, banks had discontinued those products.

SBI’s decision to ponder over such products came after the banking regulator mandated banks to link floating rate retail and MSME loans to an external benchmark. SBI, in fact, pioneered such a product by linking its home loan rate to repo rate, which it started offering from July.

Many other public sector banks followed suit before the RBI mandated such products for the entire banking system from October 1.

SBI, however, decided to withdraw the product earlier this month following the RBI norms on external benchmark-linked floating rate loans and is re-working the product in line with the guidelines.

Arm of Reliance Communications files for bankruptcy protection in U.S. court

Bill Barney

Reliance Communications (RCom) on Wednesday said its wholly owned subsidiary Global Cloud Xchange (GCX), which has filed for bankruptcy protection in a U.S. court, was planning to reduce its bond debt by $150 million.

“GCX has announced a pre-packaged plan of reorganisation to support its long-term growth and development by reducing bond debt by $150 million, providing a permanent capital structure that includes working capital facility and transitioning the business to new ownership,” the company said in a filing with the exchanges.

New loans to firm

Under the new plan, GCX’s senior secured note holders would become owners of the company and provide new loans to support and grow the business. GCX, that owns one of the world’s largest private sub-sea cable systems, filed for bankruptcy protection in a U.S. court on September 15 after it missed payments on its $350 million of 7% bonds that matured in August this year.

“Upon emergence from this process, the company expects to be well-positioned to aggressively pursue its business plan independent of the overhang caused by its corporate parent’s challenges,” GCX said, adding that more than 75% of the company’s lenders have already committed their support for the plan.

To ensure GCX maximises value for its stakeholders in this process, the company will also use the protections and framework of Chapter 11 to undertake a sale process that welcomes additional prospective buyers. GCX expects to complete the Chapter 11 process and emerge as a stronger company within the fourth quarter of 2019.

“We appreciate the strong collaboration with our lenders, which has resulted in a plan of reorganisation that allows us to honour our commitments to employees, customers and suppliers,” said Bill Barney, chairman and CEO, GCX.

Overseas investors have so far pumped in up to ₹25,000 crore in projects

In a new trend in the road infrastructure space in India, pension funds, sovereign wealth funds and private equity funds from Canada, Abu Dhabi, Australia and Singapore are seen emerging as new owners of road assets, replacing traditional owners like IRB, GMR, Dilip Buildcon and L&T, to name a few.

So far, these funds have collectively pumped in about ₹20,000-₹25,000 crore in up-and-running road assets and more funds are on their way. “Ownership of road assets has significantly changed over the last two years. Suddenly, there has been a change in ownership pattern,” said Jagannarayan Padmanabhan, director and practice leader, Transport Infrastructure Advisory, Crisil Risk & Infrastructure Solutions.

“Earlier it was L&T IDPL, Ashoka Buildcon, IL&FS and others who were the road developers. Now, you are having a separate set of owners of assets who were not active in this space. These include GIC, CDPQ, CTPID, CPPIB, Macquarie and Esquire Capital, who have now become owners of road assets.”

Some of the other foreign investors in Indian assets include AMP Capital and National Infrastructure & Investment Fund (NIIF), in which Abu Dhabi Investment Authority (ADIA) has made significant investment.

“What this means is that other than NHAI, foreign investors are controlling a certain percentage of India’s road assets. That is a significant twist in how things pan out,” he said. These strategic investors are looking at the long term, he said. He added that the Centre’s plans for investment of ₹100 lakh crore in infrastructure in 5 years seemed to be far-fetched.

“Internally, last year we had a view that in the next 5 years, the need for investment is about ₹50 lakh crore.

“While the share of central government funding is close to 45%, State governments will spend 25-27% and the rest will be done by the private sector. This means that the Centre is not going to spend the planned entire ₹100 lakh crore,” he said.

‘Higher prices and increased shipments of orthodox teas led to improved show’

Amid tensions in West Asia, India has managed to raise tea exports to Iran, doubling its shipment volume to 17.7 million kg between April and July 2019, from a year earlier.

This has happened when overall tea exports have remained flat at 73.2 million kg between April and July 2019 against 73.4 million kg between April and July 2018, with exports changing marginally to most destinations.

Unit prices of Indian teas, too, rose to ₹282.9 against ₹197.6 and $4.1 against $3.5 for the period under review.

Tea exports were valued at ₹1,676.7 crore against ₹1,491.2 crore with improved prices. Tea Board of India deputy chairman Arun Kumar Ray said export prices rose on the back of improved tea quality, which came after last year’s curtailment of production during the winter months. “This and increased exports of orthodox teas led to the improved show at Iran,” he said.

Over the years, several measures have been taken to woo the over 100 million kg Iranian tea market.

In recent times, the Commerce Ministry and tea industry have jointly taken several initiatives, including participating in buyer-seller meets in Tehran to expand the network. India also has seller-meets with visits to tea estates to build trust on issues such as good manufacturing practices.

“These [initiatives] have led to increased exports,” said Sujit Patra, secretary, Indian Tea Association.

Merchant exporters are wary about raising a toast to Iran exports. Their concerns arise out of the existing rupee-rial export mechanism pursued for exports to Iran, and stem from the U.S. economic sanctions on Iran and its restrictions on dollar trade with the country. In 2019, methods like advance payment and forward contracts were made to ease exports of certain commodities, including tea.

Reserves built up through prior oil imports were converted to rupee to help exports. These reserves were now running out and if tensions continued, they would cast a shadow on India’s most promising orthodox export market by next year, merchant exporters said.

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