HDFC sees home loan rates rising by 50bps by mid-2010

However, higher rates will not impact demand if property prices remain stable, says HDFC’s Renu Sud Karnad

Housing Development Finance Corporation (HDFC) expects interest rates on home loans to increase by 40-50 basis points by the middle of next year as inflation inches up, but that will not impact the demand for home loans, its joint managing director Renu Sud Karnad told Moneylife.
“The interest rate might harden by 40-50 basis points by the middle of next year, but I don’t think that will change the demand scenario,” she said.
However, “What worries me more is that property prices are going up again over the past two months. Developers should understand that affordability is very important in the Indian scenario. They should not let short-term benefits erode the long-term ones,” she said.
HDFC has seen robust growth in its home loan portfolio, mainly in Bengaluru, Mumbai and Chennai but also in smaller cities. Ms Karnad expects this trend to continue in the coming quarters. “I think genuine buyers have now come into the market due to the drop in property prices. The demand is here to stay, as the housing shortage is huge, and I am very confident that we are going to see good numbers in the March quarter,” said Karnad. 

– Pallabika Ganguly [email protected]


Power supply franchisee model cuts losses, improves supply quality

While the franchisee model in power supply has helped to significantly reduce losses, there is room for improvement in areas like arrears recovery, bidding process and franchisee monitoring, says an NGO report

Franchisee models for power supply could significantly help to cut down losses. This is an observation made regarding Bhiwandi town, which had high technical and commercial losses in the pre-franchisee period, says a report by Prayas, a Pune-based NGO which specialises in energy research. Supply quality has also improved considerably after implementation of the franchisee model.
However, recovery of arrears and lack of customer confidence in the franchisee for metering and billing systems remains a problem, says the NGO.
The report, made public on Wednesday, revealed that the franchisee, Torrent Power Ltd (TPL), has been able to significantly reduce losses in the Bhiwandi circle. In the first two years of operation—since the agreement was inked in 2007—aggregate technical and commercial losses have come down from 63% to about 19% as per the data made available by the Maharashtra State Electricity Distribution Company Ltd (MSEDCL). These reductions in the technical and commercial losses have been brought about by a capital infusion of over Rs200 crore in the first year of operations to upgrade the distribution system coupled with several management and administrative changes.

The study also reported improvement in the supply quality post implementation of the franchisee model. Consumers in Bhiwandi are finding it much easier to get new connections. Transformer failure rates and accidents have reduced significantly and about 66% of respondents surveyed by Prayas opined that the change has been good for consumers, stated the report.

However, lack of post-franchisee monitoring by the licensee has also been highlighted as an important shortcoming in the model.

MSEDCL handed over power distribution in the power-loom town of Bhiwandi to TPL under a 10-year franchisee agreement in January 2007. The urban, input-based franchisee model is considered to be the next step in distribution reforms. Prayas carried out a detailed study of this model for the Planning Commission of India.

The input-based franchisee model, as implemented in Bhiwandi, is an arrangement under which a private company (in this case, TPL) was appointed to manage distribution business of the Bhiwandi circle of MSEDCL for a period of 10 years. The franchisee pays an agreed input rate to the licensee for input energy injected into the franchisee area.

Though there have been significant reduction in the losses and improvements in the supply services, a certain amount of customer dissatisfaction on billing rates and failure in recovering arrears remains a serious concern. As per the Prayas survey, a few consumers do not have confidence in TPL’s metering and billing systems. High bills and fast-moving meters were common complaints voiced by consumers during the survey.

As per the report, TPL has collected less than Rs10 crore towards accumulated arrears till date. The claimed total arrears amounted to Rs1,000 crore, according to the NGO.

The franchisee agreement stipulates certain processes and timeline (quarterly and annual) for undertaking audits of average billing rates, subsidy claims, metering & billing systems and customer databases. In case of the Bhiwandi franchisee model, even after two years after signing of the deal, none of these audits had been completed by the franchisee and independent auditors assigned for such exercises.
Some lacunae in the bidding process for such franchisee models have also been reported in the study. In case of the Bhiwandi model, major changes in the franchisee terms were affected after completion of the bidding process. The request for proposal (RFP) circulated to all prospective bidders contained only principles of the franchisee agreement, and the actual franchisee agreement was prepared after awarding letter of intent to the winning bidder.

In Nagpur, where a similar model was implemented, there was a major improvement over the Bhiwandi bidding process. The RFP contained a full-fledged franchisee agreement and not just principles of agreement. But here the shortcoming was in the bid evaluation process. A three-tired entity comprising MSEDCL, the High Court and the Maharashtra Electricity Regulatory Commission (MERC) failed to point out un-viability of the winning bid. These two instances, of major shortcomings in the process of awarding franchisee contracts in Bhiwandi and Nagpur highlight the underlying dangers and weakness in the ability of State-run utilities to conduct a transparent and rational bidding process, stated the report.

- Amritha Pillay [email protected]


Trading MFs through brokers may not be cost-effective for investors

SEBI’s move to attract more retail investors in MFs can succeed only if it imposes measures to lower transaction costs

In a move to increase the reach and availability of mutual funds (MFs), market regulator Securities & Exchange Board of India (SEBI) has proposed trading of mutual fund units through stock brokers. While this move, which SEBI plans to introduce by March 2010, may be well-intentioned, there are certain issues that need to be ironed out for it to be a hit among retail investors.

Existing MF holders who do not have demat accounts need to open depository and brokerage accounts. Opening a brokerage account involves an initial deposit and various expenses such as annual maintenance charges and brokerage charges per transaction. According to industry sources, the commission structure will roughly be equal to that of a delivery-based brokerage, that is, 0.25% to 0.50% of the total transaction value.

So, from investors’ point of view, the entry load, which SEBI abolished in August 2009, will be replaced by the cost of opening a demat account and payment of brokerage charges for each transaction.

For investors holding physical MF units, the charges for dematerialisation would vary from broker to broker. “It could be a fixed charge of, say, Rs25 plus Rs3 per MF statement. However, the charges will have to be approved by SEBI and the stock exchanges,” said Chandrashekhar Layane, senior vice-president, FairWealth Securities.

In addition, “a broker can charge 1% or 1.5% as management fees based on the total assets under management (AUM) of the client, subject to SEBI approval. For this to happen, further clarification is required from SEBI,” said Mr Layane.

Earlier, MF distributors received commissions when investors bought MF units, but not when investors sold units. However, stockbrokers can charge brokerage from both buyers and sellers.

Brokers may also levy advisory charges, although their knowledge and expertise in dealing with MFs is open to question. As brokers are more conversant with equity markets, they may not be inclined to focus on MF investors.

Also, there is no clarity yet on the NAV (net asset value) at which MF units will be traded through stockbrokers. Currently, MF houses calculate the NAV of a scheme based on the previous day’s share prices. Moreover, trading MF units through the stock exchanges will expose them to a higher level of price volatility.

According to SEBI , “Stock exchanges with their reach covering over 1,500 towns and cities and through over 200,000 stock exchange terminals can be used for facilitating transactions in MF schemes. The stock exchange mechanisms would also extend the present convenience available to secondary market investors to MF investors.”

SEBI’s new move to increase retail participation in mutual funds will succeed only if it reduces the transaction cost by implementing norms that dissuade brokers from overcharging investors through a plethora of ‘hidden charges’.
 Ravi Samalad [email protected]



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