Shekhar Ghosh
LAST month, an Aurangabad-based engineering firm
received a query from a Thai export house about
a large consignment of alloy gaskets.
Some three years ago, a spate of similar orders
had forced the company to import brand
new machinery worth Rs 20 crore.
Almost the entire cost was borne
by bank borrowings.
Then came the slowdown in both
export orders and domestic demand:
the company has been unable to repay
even the interest on the loan every year.
Banks need to lend the cash
out for a profit but memories
of bad loans are still fresh and
so they aren't lending.
Instead, working capital loans have risen
further. So last month, when the owner
visited his bank for another Rs 10-crore
working capital loan for the Thai order
which would translate to a roughly Rs 30-crore profit,
the bankers refused. With the Thai economy itself
in doldrums, even the export order could not
be properly trusted. Last week, the promoter
finally informed the Thai company of his
inability to meet the order.
India's corporate backyard is currently
littered with such tales of woe.
"What's worse, you can neither blame
the bankers nor the corporates for
such cul-de-sacs,"
says the executive director
of a nationalised bank.
That there has been a slowdown
in certain sectors of the economy
is well-established. Many corporate
houses—big and small—are finding it
extremely difficult to service their debt.
At the same time, banks are flush with cash.
Deposits have been growing every month.
Over June 1997, deposits increased by
18 per cent in May this year, reaching
a whopping Rs 61,545 crore.
At the same time, bank credit to the
commercial sector is on a decline.
In May, it was only 68.5 per cent of
bank deposits. The 1997-98 bank results
are indeed a cause for worry.
While profits of 29 major banks
have jumped by over 40 per cent,
there isn't much to cheer.
The deposit growth for the banking
industry during 1997-98 was way ahead
of the growth in advances at 15.5 per cent,
according to figures released by the RBI.
Indeed, the pressure on spreads for the
banks—the difference between interest
earned on loans by banks and interest paid
on deposits—has been increasing.
In all cases, spreads declined last fiscal
year or, at best, remained stagnant as banks
competed to attract short-term deposits.
By reducing the interest rates and the
cash reserve ratio, the RBI has put
further pressure on banks.
They had to slash lending rates
following an increase in liquidity,
but could not reduce deposit rates for
fear of losing customers.
Says Rajiv Verma, banking analyst at W.I. Carr:
"The structure of Indian banking is such
that spreads come under pressure when
the rates drop. SBI has been the most
vulnerable in this matter because of
the large proportion of long-term deposits
which it has not been able to re-price,
despite falling lending rates."
It's a strange situation: top-rated companies
can easily borrow from banks, but they have
access to even cheaper alternatives like external
commercial borrowings (ECBs),
private placement and commercial paper,
while small and medium-sized corporates
which need funds most are starved of resources.
These corporates attribute stringent pre-disbursement
conditions set by the financial institutions to be
largely responsible for their inability to get funds
against even those loans that are already sanctioned.
Some banks and institutions also demand promoter's
contribution upto 75 per cent of the project cost.
"If we had that kind of money, we wouldn't
need any loans," says a victim promoter.
The bankers, in turn, blame the history of India's
smaller companies. Explains a consultant to a leading
private bank: "Several companies had overstretched
their capacities expecting a higher rate of economic
growth.
More pertinently, they raised huge
amounts from stockmarkets and banks
to put up large projects.
Many smaller and midsize companies took
the investing public for a ride during the
primary market boom. Promoters are known to
have run away. It would be worse if the
banks did not ensure their commitment."
Today when the bottom has fallen out of
the stockmarket and over 3,000 companies
are trading below or at par, the investing
public is finding it safer to put their money
in banks and earn between 8 and 10 per cent rate
of interest. That's why deposits are growing so fast.
Banks need to lend this cash out to make
a profit, but memories of all those bad
loans are still fresh. And blue-chip companies
with high credit ratings cannot use all the
funds available with the banks either due to the
recessionary environment or because they are
already cash-rich.
Banks are now trying to find novel modes
of investment for their surplus cash.
For instance, overseas money markets,
where returns from short-term instruments
are at least 150-200 basis points (1.5 to 2 per cent)
higher than those on similar domestic instruments.
But as per RBI guidelines, banks can only deploy
funds to the extent of their nostro limits
(non-resident deposits plus the overseas investment
limits which is 15 per cent of the banks'
net worth or US $10 million, whichever is higher).
Says S. Gopalkrishnan, executive director of Bank of India:
"To take advantage of the integration of money,
forex and gilt markets, we have started an
integrated treasury branch. We are also taking
steps to integrate the bank's dealing room worldwide
to have a global treasury in Mumbai."
The government is not unaware of the problems.
One way it is trying to tackle the situation
is by giving banks far greater freedom.
Says K. Kannan,
chairman-cum-managing director
of Bank of Baroda:
"To cut down on bad debts and for the recovery
of loans, the RBI has decided to offer banks a
broad set of directives within which they can
determine an approach for recovery of overdue
loans best suited for the bank."
The finance ministry has already
clarified that there will be no end-use
restrictions on banks wishing to invest
in bonds floated by companies,
even if they are meant for takeover
of companies. Several mergers and
takeovers may now be initiated by banks
themselves.
For example, several mid-size cement
companies which are unable to pay off
their loans are almost expecting their
banks to find a white knight for them.
"Such need-based merger activities prompted
by Indian banks might yet become a trend,
" says Anand Vasudevan, banking analyst
at UTI Securities.
The SBI has also launched the
"general purpose corporate loan",
a normal banking procedure in developed
markets. It has cleared a Rs 200-crore
seven-year loan to ITC for which the end
use is not specified. The interest charged
on such loans will be higher than normal
term loans. However, analysts fear that
even if this becomes a trend, such loans
will only be given to bluest of the blue chips.
This won't solve the problems of the mid-cap
and smaller corporates. Having realised that
the small-scale sector was the worst hit by
the tightening of bank's credit, the RBI had
set up a one-man high-level committee headed
by S.L. Kapur, former secretary in the industry ministry,
to suggest steps for improving the delivery
system and simplification of procedures for
credit to SSIs. While the committee submitted
its report to the RBI on June 30, it was only
last week that the RBI accepted 35 of its
126 recommendations.
Bank branch managers will now have more
power to grant ad hoc limits, and banks
will now be free to decide their own norms
for assessment of credit requirements.
Loan limits have also been raised—application
forms prescribed for loans up to Rs 2 lakh
can now be used for Rs 10 lakh loans and
those for Rs 50 lakh and more can now be used
to ask a loan up to Rs 2 crore.
The central bank has also asked banks to
delegate powers to branch managers to grant
ad hoc facilities to the extent of 20 per cent
of the limits sanctioned.
The most important part of the
recommendations, however, is RBI's circular
to the banks that the flow of credit to SSIs
will now be assessed by using data on
disbursement rather than outstanding balances.
Banks have, therefore, been advised to shore
up their disbursement targets along with their
outstanding balances.
Will all this be enough?
Some are sceptical. For example,
M.S. Verma, chairman, SBI,
who says banking in India in the next
millennium will be very different
from what we have been used to till now:
"By changing procedures and interest rates,
we might get some incremental advantage.
To change the growth rate, we have to
look at strategic issues rather than
procedural ones."
In other words,
response of a totally different order.
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