India Gets Caught up in Whirlwind of Credit Card Debt

It looks like credit woes are pretty much the same around the world. The Indian middle-class, enjoying rising prosperity, has gotten caught up in fast-rising revolving credit card debt that they seem to little understand and have difficulty managing.

Unsecured loans and credit card receivables more than three months overdue: 7%-9% of total loans outstanding this year; expected to rise to 15% according to ratings agency Crisil Ltd. in Mumbai.

Number of credit cards in India: 30 million, up 3x in the last 5 years.

At the end of FY '08 (ended March 31) Indians charged more than $14 billion on their credit cards, over 3x the amount charged four years ago.

Indians have little experience with handling revolving credit and more people are turning up desperate for help with their credit card payments, according to V.N. Kulkami, chief counselor at Mumbai's Abhay Credit Counseling Center, which advises borrowers.

Credit Card Payments in India 2004 - 2008

Source: WSJ

The Housing Story, cont.

Housing is still in a dismal state with mixed messages on where the market is heading, although I think most analysts are far too optimistic in their assessment. The S&P/Case-Shiller home price index hit record lows for June 2008, posting a record 15.4% decline in home prices over the second quarter of last year, worse than the 14.2% drop posted in the first quarter. (Composite-10) The monthly numbers issued showed home prices in 10 major metropolitan areas fell a record 17% in June from the prior year and 0.6% from May, according to the indexes. The month-to-month drop improved from 1% in May over April.


In 20 major metropolitan areas, home prices dropped a record 15.9% from a year earlier, and just 0.5% from the prior month. That’s better than the 0.9% drop recorded in May over April.

S&P/Case-Shiller Index for June 2008

20-City Index: -15.9%
N.Y. Metro: -7.3%
Las Vegas: -28.6%
Los Angeles: -25.3%
Miami: - 28.3%
Phoenix: -27.9%
Washington: -15.7%

S&P/Case-Shiller Composite-20 Trend Line
Source: S&P

The only good news here is that the declines are starting to moderate, as seen in the slope of the graphs for May and June 2008.

Adding to the dismal news the supply of pre-owned houses on the market now stands at an 11 month backlog, normally that number is 6 months.

Supply of Pre-Owned Homes on the Market Stands at 11 Months

Home prices in areas where prices had been pretty much stable, such as Bergen County, NJ, have started to crack with a drop in median home prices of 2.3 percent in the first half of 2008, compared to the first half of 2007. Additional trouble can be seen in the foreclosure rate with 2,800 North Jersey homes in some stage of foreclosure, about one in 135, compared with 1,000 homes, or one in 385, a year ago. Foreclosed homes add an additional drag to housing prices, as foreclosed homes usually sell at a steep discount to their market value when sold by banks.

Foreclosure Actions in North Jersey

Add to all this that roughly $1.9 trillion in available credit has dried up, largely due to bank losses in the home mortgage industry, then the housing industry is in for a continued rough ride. While some analysts forecast an upturn in 2009 or at the latest 2010, I don't see much good happening to housing until 2011 or perhaps even 2012. There is just still too much pain in the system that still needs to be worked out. And remember, when the Japanese mishandled their housing burst-bubble and banking crisis in the '90s by shoring up insolvent banks, their recession lasted ten years as a result.

Further adding to bank woes is the hundreds of billions of dollars of floating-rate notes the banks took out to finance their housing bubble lending binge. The crunch will begin next month when banks have to pay off $95 billion in floating rate loans that come due. J.P. Morgan Chase & Co. analyst Alex Roever estimates that financial institutions will have to pay off at least $787 billion in floating-rate notes and other medium-term obligations before the end of 2009, about 43% more than they had to redeem in the previous 16 months. The pain of the credit crunch will not end soon with for lenders or borrowers.

Banks will have to redeem $787 billion in floating rate notes over the next 16 months that were sold to finance their lending binge

Suffering from a $1.9 Trillion Dollar Shortage in Credit

The Fed has cut its target interest rate 3.25 percent since last September, but interest rates remain stubbornly high. Rates on 30 year mortgages went for 6.6% last week, compared with 6.4% on the day the Fed started cutting rates. Corporate borrowing rates have risen to 6.1% from 5.9%. The Wall Street Journal quotes David Rosenberg, Merrill Lynch's bearish chief North American economist saying in a note to clients, "In over two decades of experience on the Street, let's just say I have never seen this condition before, and [Ben] Bernanke has only read about it."

Why this divergence? The biggest reason is the credit crunch. Says the WSJ:

Banks have lost roughly $480 billion in the past year, but have raised only about $345 billion in new capital, estimates James Bianco, president of Bianco Research. Assuming they weren't overcapitalized before, that leaves them about $135 billion undercapitalized.

With leverage, that capital translates into roughly $1.9 trillion in lending capacity now off the market, he estimates.

In short, Supply and Demand: an absence of $1.9 trillion in lending supply has driven up the price of borrowing, despite the federal funds rate.

Key Interest Rates Diverge, Wall Street Journal