If you took a 10-year, Rs 10 lakh home loan a year ago, you would now be saddled with an additional burden of just under Rs 1,700 on your monthly instalment. And, last year, if you had bought a car with the aid of a four-year, Rs 6 lakh auto loan, your outgo would be higher by a cool Rs 1,000 every month. That's the effect of mounting interest rates for you. Consumers are feeling the pinch, because two of the largest retail lenders, ICICI Bank and HDFC-which control close to 80 per cent of the home loan market-don't have the luxury of low-cost deposits (which public sector banks do). Says Shailendra Bhandari, Managing Director, Centurion Bank of Punjab: "Rising interest rates do two things-they slow down demand and also increase delinquencies."
The first effect is already beginning to be felt. Market leader ICICI Bank, which has almost half of its retail assets in home loans, has seen a dip in mortgages growth, from over 30 per cent in 2005-06 to around 25 per cent in the recently-concluded year. That's still robust growth without a doubt, but according to ICICI Bank estimates, growth is expected to taper off further to just about 20 per cent this fiscal. Says Rajiv Sabharwal, Senior General Manager, ICICI Bank: "Interest rate hikes along with high real estate prices will lead to a slowdown in growth." HDFC, too, concedes that the rapid interest rate hikes along with the imminent correction in property prices, particularly commercial property prices in some pockets, will drive investors out of the market. But Renu Karnad, Executive Director, HDFC, isn't entirely convinced by the RBI's cautious moves. "The recent interest rate hikes were maybe not entirely warranted and if you see, they have not done much to control inflation either. I hope we don't see any further hikes," she says. However, she doesn't expect HDFC to take a big hit in a high-interest rate regime. "In the past, we've grown at 28-30 per cent; going forward, we should grow at about 25 per cent."
However, other categories of retail lending, like two-wheeler, car loans and consumer durables may face the heat, with not just demand for loans slowing down but also, as a result, demand for the product itself. Says Pralay Mondal, Country Head (Retail Assets & Credit Cards), HDFC Bank: "It's a price-sensitive category. People buying two-wheelers very often don't have high disposable incomes. So rate hikes will impact sales."
Will Mega-projects Be Put On Hold?
Borrowing locally for growth may not be a great option.
The infrastructure sector has shown improved growth of 7.8 per cent during April-November 2006 from 5.2 per cent in the corresponding period of the previous year. But the road ahead looks uncertain as higher levels of interest rates may result in many projects being put on the backburner.
There is an estimated $320 billion infrastructure investment planned in the next five years between 2007-12. "There may be some delay or deferment of a decision due to interest rate uncertainty, although I don't see people shelving infrastructure projects as it's the government's top priority," believes Bhaskar Ghose, Managing Director, IndusInd Bank.
Yet, short-term deferments or delays may mar the growth prospects of the engineering sector, which has been riding high on orders from industries like power, steel, ports, roads and airports. The public sector BHEL, for instance, had an order book running into Rs 55,000 crore at the end of December 2006. Larsen & Toubro had a backlog of orders worth Rs 35,700 crore in the same nine-month period.
WILL EARNINGS LOSE THEIR MOMENTUM?
Last fortnight, IT services bellwether infosys technologies scorched the Street by announcing a set of spectacular numbers, with net profits spurting 69 per cent for the fourth quarter over the previous year's corresponding period. That, however, may be one of the few slivers of sunshine on the earnings front in the quarters ahead. Reason? "The next four quarters are going to be bad for India Inc.," warns Nipun Mehta, CEO, Unitis Tower, a wealth management advisor. "The dream run of 16 impressive quarterly corporate performances will hit a speed breaker. The favourable factors that helped India Inc. post surprising results have taken a U-turn." Those factors are, of course, interest rates, inflation, and commodity prices, which have all nudged upwards into perilous territory which, in turn, will impact earnings of companies, thereby, making valuations looking overstretched. "Increasing their misery is the higher profitability base of India Inc.," says Sangeeta Purushottam, Head (Institutional Business), Religare Securities, who feels "the slowdown will be strictly sector-specific." Over the past 16 quarters, the earnings of India Inc. have averaged a cumulative growth of 40 per cent. Gagan Banga, Executive Director, Indiabulls Financial Services, expects corporate profitability to slow down in 2007-08, "to around 15-16 per cent from previous estimates of 18-20 per cent".