[amitoj]

I remember a time when getting a loan from a nationalized bank for non commercial purposes used to be akin to winning the lottery! The chances were that slim!!

[Samurai]

Originally Posted by amitoj

I remember a time when getting a loan from a nationalized bank for non commercial purposes used to be akin to winning the lottery! The chances were that slim!!

With or without Co-lateral?

[amitoj]

Originally Posted by Samurai

With or without Co-lateral?

Both.
Getting anything done at a bank used to mean taking a day off from work. Even then you'd be lucky if you didn't get the runaround!
Only thing that used to speed up anything used to be knowing the bank manager! My mom used to teach at a commerce college. Thankfully that helped!

[Samurai]

Unsecured loans were unheard of then, no bank manager would risk that unless under political/other influence. Loan Mela was a huge exception to that.

Secured loans were possible, but less so for depreciating assets like cars. Even otherwise, bank managers took their time assessing the risk since they would be answerable to every defaulted loan.

[reverse_gear]

Originally Posted by ramzsys

The Wholesale inflation is negative(WPI, -2.xx%).
The Consumer inflation is positive(CPI, 5%).

Does this mean our retailers are greedy?

Originally Posted by alpha1

No, it means our public has growing income far beyond expectations and this is driving the retail prices of most commodities up.

Let us, for a moment, believe in your hypothesis. If you (as a non retailer) see this, won't you want to jump into this lucrative business where you can manifest your greed and rake in banknotes?

Main reason is difference in components of the two indices. The linked article will give you some information about this.

DYK: The components of WPI and CPI differ

In the current environment, commodities are in recession - oil, metals, etc. As these are input items, they will contribute to lower WPI. On the other hand, CPI is based on value added final consumption prices. They may not go in lock-step with the WPI prices because of other costs (labour, finance costs, rentals, value added, etc. and profit margin). This does not mean that retailers are making more margin.

Originally Posted by alpha1

Even if we were to break up large banks into smaller ones, how would the breaking up prevent the now smaller banks (say Citi1, Citi2,Citi3, Citi4 etc) to bet on derivatives?

It is not that only large banks were betting on the Subprime CDOs (when they got bust last decade). In fact what might happen with the small banks going bankrupt is that the Fed or the Govt may not provide any help. That means all the folks who parked their money with such a small bank stand to lose. And all the folks working in those banks also stand to lose. And so do people who live off these folk's money - like the gardener, the tailor, the barber, the restaurant, the IT companies (and their employees) etc.

You can't prevent banks from betting on derivatives or bad loans or stop them from failing. BUT systemic risk is much reduced if a small bank fails. Much easier for the Fed to manage and bail out. However, if Lehman fails, the entire world goes into recession for a couple of years. Lehman is not easy to resolve as no one can take it over whole and this exposes the entire system to risk.

Any number of small banks have failed (in the US as well as elsewhere including India) in the past. The Fed just step in and have a larger regional or national bank absorb the failing bank and the depositors are protected. You may remember cases like Global Trust Bank and Centurion Bank in India, which did not cause any systemic issues.

[arunkumarsarat]

Originally Posted by Samurai

This argument was answered long back by Elizabeth Warren long back...

Originally Posted by Samurai

And here is why scams will continue to happen in the US financial market. The regulators are not interested in regulating, instead they are in bed with the banks.


It has to be seen to be believed...

Saw both the videos just now. Thank you very much for the videos. It is unbelievable that America has not yet learnt their financial lesson.

Glass Steagall Act is absolutely essential to protect the middle income Americans. I was over whelmed by the arguments of Elizabeth Warren and she has to be appreciated for showing the courage to stand against the might of the American financial empire.

Now I also know why our RBI governor takes his own time while making even seemingly simple financial decisions pertaining to the Indian economy.

[Samurai]

Originally Posted by arunkumarsarat

I was over whelmed by the arguments of Elizabeth Warren and she has to be appreciated for showing the courage to stand against the might of the American financial empire.

Absolutely, I have been following her on youtube for years now. Her credentials are impeccable too...

Originally Posted by wiki

Warren joined the University of Pennsylvania Law School as a full professor in 1987 and obtained an endowed chair in 1990 (becoming William A Schnader Professor of Commercial Law). She taught for a year at Harvard Law School in 1992 as Robert Braucher Visiting Professor of Commercial Law. In 1995, Warren left Pennsylvania to become Leo Gottlieb Professor of Law at Harvard Law School.[30] As of 2011, she was the only tenured law professor at Harvard who was trained at an American public university.[31] At Harvard, Warren became one of the most highly cited law professors in the United States. Although she had published in many fields, her expertise was in bankruptcy. In the field of bankruptcy and commercial law, only Douglas Baird of Chicago, Alan Schwartz of Yale, and Bob Scott of Columbia have citation rates comparable to that of Warren. Warren's scholarship and public advocacy were the impetus behind the establishment of the U.S. Consumer Financial Protection Bureau.

Originally Posted by arunkumarsarat

Now I also know why our RBI governor takes his own time while making even seemingly simple financial decisions pertaining to the Indian economy.

Did you know he had predicted the 2008 meltdown in 2005?

http://www.wsj.com/articles/SB123086154114948151

[arunkumarsarat]

Originally Posted by Samurai

Did you know he had predicted the 2008 meltdown in 2005?

Yes I had read that he predicted the financial crisis, but only now read the article in the Wall Street Journal.

The article aptly says "punishments for losing money are in line with rewards for earning it". How true, not only for finance but valid in every business that witness a spurt in growth and thereby start making windfall profits.

It is difficult to think of monetary "punishments" when the going is good and caution is thrown to the wind, ultimately resulting in a crisis.

[RSR]

Originally Posted by arunkumarsarat

Now I also know why our RBI governor takes his own time while making even seemingly simple financial decisions pertaining to the Indian economy.

In recent times, the RBI (with governors like Messrs. Rao & Rajan at the helm) has proved to be an unlikely ally of India's poor & wretched, the working class, pensioners etc.

Had it not been for the RBI and its steadfast stance of controlling inflation through interest rates, the short-sighted politicians (irrespective of the government in power) and the industrial complex would have made life extremely miserable for the mango people. The good-for-nothing mainstream media horde have been faithfully regurgitating the shrill calls for rate cuts from their masters continuously for years now. They simply don't care about the miseries of ordinary people.

High inflation would have made life intolerable for the mango people. Only the rich and the black-moneyed class would remain unaffected by high inflation. No wonder then, that they have been shouting from the roof-tops for rate cuts for a long time now.

One has to appreciate the RBI for carrying out its mandate judiciously and responsibly, without giving in to enormous pressure from various quarters.

[maddy42]

I have a couple of queries which i would like answered.

How safe is the indian banking system to scams like the american one? People are investing in housing like no tomorrow even though there are stats which states over 6lac houses are unsold in the major metros. The prices never falls and i dont know where is the limit. At one point middle class bought houses worth 30-40 lacs, then it became 80 lacs and now you hear folks buying houses worth 1-1.5 and those are middle class?

When i was getting a education loan the bank asked for 100% collateral in terms of FDs in the same bank which was not released till the loan was cleared. On the other end every big major industrialist from 06-14 got loans which were in simple terms more than aukat and now we have a state where the economy is fine but banks are unwilling to lend as their NPAs have reached a ridiculous level.

Would be interested to know what would be the best way to improve the indian financial industry and the economy as a whole without making another generation pass.

Maddy

[reverse_gear]

Originally Posted by maddy42

Would be interested to know what would be the best way to improve the indian financial industry and the economy as a whole without making another generation pass.

Whoa! Looks like you are gunning to be the next FM of India. All the best, buddy.

In random order, I would pick out the following:
- eliminate or substantially contain black money in the system (though easier said, it can be done to a great extent)
- enforce tax compliance
- eliminate corruption in government offices and PSUs
- urban town planning and develop public transport infrastructure
- revamp education and public health delivery

Originally Posted by maddy42

How safe is the indian banking system to scams like the american one? People are investing in housing like no tomorrow even though there are stats which states over 6lac houses are unsold in the major metros. The prices never falls and i dont know where is the limit. At one point middle class bought houses worth 30-40 lacs, then it became 80 lacs and now you hear folks buying houses worth 1-1.5 and those are middle class?

The risks to the Indian banking are less from retail borrowers and more from large corporate borrowers. So quite different from US situation. While I am not offering a comment on the current house prices in general, I would recommend that you should look at this in the context of the earning potential at the individual level. For example, when I graduated from a premier engineering college just over 20 years back, TCS starting salary was Rs.2,750 and Infosys was Rs.3,500 pm. And these companies used to hire a couple of hundred new graduates in a year. Now, for the same qualification, starting salary is Rs.35,000+pm. And the companies are hiring more than 20,000 annually. So, theoretically, all else being equal, housing prices can rise up to 10x without affecting the individual adversely. I do not mean to say that prices are rational or should not correct, but the context of disposable income is important to understand general price levels.

BTW, if you think prices of 1-1.5 cr are whacky, why not try out in my city of Mumbai, which has consistently provided the WORST value for money when it comes to housing infrastructure. For your budget, you are probably looking at a single room in the city or a house which is 30-40km outside the city centre. The middle class has been totally eliminated from the housing scene here, while prices continue to remain unrealistic and occupancy remains abysmal.

[Saanil]

I do not think it makes sense to apply principles of economics in Housing sector - especially in Mumbai. I have been hearing from a lot of people since 2003 that house prices are very high and that they will fall. Now some of my relatives are telling me that house prices will not rise much but they will definitely not fall.

I think one cannot apply economic theories here because this is simply not an efficient market. I think buying a house in Mumbai is one of the toughest things and I really admire people who are able to do so. I am 27 years old, single and thought of having a look at the EMI's if I took a home loan. I was using HDFC's EMI calculator for this purpose. I came to know that a 2 BHK flat in Borivali East (near highway) costs 1.2crores. I assumed interest rate of 9% and a tenure of 20 years. The EMI came out to be 1.07 lakh. That implies that my salary has to be >3-4 lakhs per month. As far as I know there is a very small section of people who earn this much at the age of 27. I find this statistic absolutely depressing. That is why I really admire people in the 26-30 age bracket who take a 20 year loan paying such EMI's. I have not even considered the possibility of buying a flat in say Bandra/Khar or Santacruz (which are considered somewhat better localities than Borivali).

Sometimes I think I really do not have the risk taking ability which is expected from a Mumbaikar!

[Samurai]

Originally Posted by Saanil

I do not think it makes sense to apply principles of economics in Housing sector - especially in Mumbai.

The economic theory obviously applies to Mumbai. When demand far outstrips supply, this is what happens. Just see a typical demand curve, and you will know why. If the quantity of houses are only Q2, and same number of buyers are ready to buy at P2 price, sellers will sell at P2 price. Customer who is only willing to pay P1 has no chance.

[driverace]

In addition to the Demand-Supply explanation, could you (Samurai) OR anyone else, please shed some light on:

1. The trend of the "cost of construction" over the years.
2. The trend of "price" over the same years.

Few questions from my side:

Does the Delta (Price-Cost) show any relate-able pattern with cities of similar standards of living (compared within country & compared with similar cities from other countries)?

What is typical "healthy" Delta?

Was the housing bubble-burst in USA driven by Supply-demand OR unstable-levels-of-Delta?

Thank you all for sharing links & video channels to help us understand the basics.

Regards,

Ace.

[reverse_gear]

Originally Posted by Samurai

The economic theory obviously applies to Mumbai. When demand far outstrips supply, this is what happens. Just see a typical demand curve, and you will know why. If the quantity of houses are only Q2, and same number of buyers are ready to buy at P2 price, sellers will sell at P2 price. Customer who is only willing to pay P1 has no chance.

In theory, the demand curve seems to work. But housing in Mumbai has a few distortions, making it a relatively inefficient market:
- demand is artificially inflated. This is because a significant number of home buyers are actually investors who have no interest in residing in the apartment. This category is akin to "fast money" - they will move between different asset classes and do not really provide a fundamental, consistent demand. This is slightly different from Bangalore or Chennai, where a much larger proportion are end users.
- black money and cash transactions. For a full tax payer who does not have black money stashed away, there is a starting disadvantage on an economic front as there are many others who are willing to pay part in black, which enables them to get lower prices. Again, Mumbai (and Delhi) have much higher black money component in housing as compared to Bangalore and Chennai.
- Regulatory tampering which distorts supply situation. Projects are routinely started with "X" building area, but over the course of the 4-5 years of construction, the builder manages to get permission for additional FSI or the government raises the FSI available. So by the time the project is delivered, the same area can accommodate "2X" or even "3X" construction. If you are an original buyer, you have started with a wrong assumption of supply situation, and what you thought was limited or exclusive turns out to be the opposite. This is also a supply hoarding tactic used by builders. Such things routinely happens in most large projects resulting in demand-supply distortions.