Indian Banks

Loan arrangers eye smaller banks, global finance to get over lending constraints.

Major banks which regularly lend to the power sector are shying away from lending more, as most are hitting sector exposure limits. Banking sources say as many as six major banks which regularly lend to infrastructure are rejecting proposals to lend to power projects.

While group exposure limits to the sector are fixed by the Reserve Bank of India (RBI), the board of directors of each bank fix internal exposure limits to each sector. On an average, banks fix a lend-limit of 15-20 per cent of their net worth to infrastructure. As the power sector went through massive expansion in the past three years, most banks have exhausted these limits.

While announcing its quarterly results, Dena Bank’s chairman and managing director, R L Rawal, said the bank was cautious in extending credit to the power sector, as its exposure had already touched sectoral limit.

“The bank does recognise it is an important sector that needs funds on priority. At the same time, we would like to ensure there is no concentration risk on power sector exposure,” said a Dena Bank official who refused to be identified.

Wider search
Banks which also double as loan syndicators complain it is tougher for them to find lenders. This is forcing them to look at smaller banks, which would contribute smaller amounts to finance a project. “We might have to go for smaller banks even if they lend around Rs 100 crore (only). Smaller banks would earlier not participate in funding large projects; they’ll now be welcome,” said a top official of a public sector bank.

The number of participants in a loan would also go up. Earlier, it used to take 12-13 banks for financial closure of a large sized project. Now it might take 20 banks for a single financial closure, forcing syndicators to look at new avenues of debt raising.

International loans are an option bankers are now eyeing. “We may have to look for loans from international sources as well. Loans can be availed as long-term credit or supplier’s credit to fund equipment purchases. There is appetite in the overseas market and some suppliers are willing to arrange loans through their Ex-Im banks,” said B K Batra, executive director, IDBI Bank. Reliance Power recently re-financed a part of its loans with credit from Chinese banks, as it imports most of its equipment from the country.

Syndicators are also expanding their coverage to institutions like Life Insurance Corporation and India Infrastructure Finance Co. Urban co-operative banks might be approached for loans, too.

Pool availability
“Our outlook on the infrastructure sector is positive. We do get certain tax benefits for infrastructure credit. The bank has risk appetite and has provided finance to a few projects. But infrastructure needs long-term credit, while most deposits have maturity of a maximum three years. This constrains our capacity to take exposure,” said Eknath Thakur, chairman of Saraswat Co-operative Bank, Mumbai.

R Sridharan, managing director of State Bank of India, said there is a need to enhance the ceiling limit for infrastructure lending by banks. SBI itself fixed a huge limit of Rs 1 lakh crore to finance infrastructure projects.

“In long-term financing, often huge asset-liability mismatch can come up. Moreover, commercial banks have some limits to finance infrastructure projects,” he said.

IDBI says it will continue to lend to the power sector. “The power sector requires chunky assistance; that is the nature of the business. A bank’s internal exposure limits have to be aligned, among other things, to the business opportunities available in the country. One cannot set the same limits for power and other sectors like textiles or cement or even the highways sector, which have around one-fifth of the requirement of that of power,” said Batra.

The annual capacity addition targets of the power sector are around 15,000 Mw, taking yearly investment needs of the sector to Rs 75,000 crore. Of this, debt requirement is around Rs 52,500 crore. “There are quite a few projects which are currently awaiting financial closure. Also, two ultra mega power projects might seek bids this calendar year and funding those massive projects, which cost around Rs 22,000 crore (each), would be a huge constraint,” said Debashish Mishra, senior director, Deloitte Touche Tomatsu.

(BS)

Popularity: 1% [?]

Banks were turning to low-cost deposits, refinancing debt and raising cheap foreign capital to protect margins squeezed by higher interest rates at home, bank officials and analysts said.

Last month, the Reserve Bank of India (RBI) raised interest rates for the seventh time in less than a year and more increases are on the card to curb the stubbornly-high inflation.

State-run lenders Indian Overseas Bank (IOB), IDBI Bank and Rural Electrification Corp (REC) are raising cheaper funds abroad, but most are turning to the low-cost current and savings account (Casa) deposits.

“Foreign rates are at historical low levels, while domestic rates are high,” said HD Khunteta, director (finance), REC.

Loan growth for most banks has been strong so far in this financial year, leading to a higher proportion of wholesale funding, partly from refinancing institutions.

“Rather than focusing on balance sheet growth, we focus on churn and fee-income,” said Jaideep Iyer, president (financial management), Yes Bank

“We focus on non-interest income such as trade, forex, advisory services with the same clients. We are chasing more customers, so that gives more granularity to our balance sheet.”

Others like IDBI Bank are exploring options to refinance loans and deposits, shed high-cost bulk deposits and overseas borrowing.

IDBI plans to raise $1 billion by September. IOB also plans to raise a similar amount half before March-end.

“If refinancing or foreign currency borrowing gives us lower cost, we will access those sources rather than deposit sources,” said Melwyn Rego, executive director, IDBI Bank.

Low-cost deposits
The focus on low-cost casa deposits has also been rewarding for lenders. The cost of deposits is going up but we have been able to bring that down…we have been able to substitute high-cost deposits with lower costs casa and refinancing,” said S Shridhar, chairman and managing director, Central Bank of India. The casa share of its deposits increased to 34.9 per cent in the December quarter, from 29.9 per cent a year-ago, while the cost of deposits dropped to 5.7 per cent from 6.1 per cent.

Most mid-sized banks are targeting casa of 34-35 per cent over the next two years, in line with the industry average.

“Margins will be under pressure for mid-cap banks but what we have to look at is how much will margins come down, specially for those with lower casa ratios,” said Vaibhav Agarwal, sector analyst, Angel Broking.

Agarwal recommends United Bank of India, J&K Bank, Dena Bank and IOB amongst the mid-cap banks due to their “dirt cheap valuations and reasonably good casa ratio.”

(BS)

Popularity: 1% [?]

General managers may get power to approve loans.

LIC Housing Finance (LICHF), hit by a loan scam last November, is looking to revamp its structure. The aim is to avoid repetition of any misconduct by senior executives that may tarnish the image of the company.

Based on a report submitted by a committee set up for an internal assessment, the company is working on a new operational structure that will give more powers for sanctioning loans at the general manager (GM) level. The company is also working on a new model to scan loan applications.

“One of the major issue that came out was that the CEO was the sole decision-making authority for virtually every loan sanctioned. We simply did not have the capacity at the GM level and hence virtually everything ended up at the CEO’s table,” said an LIC official with direct knowledge of the matter.

According to the new norms, the GMs will have independent authority to sanction loans up to a certain amount. The involvement of the CEO in this would be nil, he said, on condition of anonymity.

“This model is followed in every bank where a majority of sanctions take place at the GM level. This will ensure diversification of responsibility, which in turn will lead to more transparency internally. Only high-value sanctions should come to the CEO. Ideally, the CEO should have a more administrative role, responsible for the overall management of the company,” he added.

The company is also working on an independent risk-assessment model which will help screen applications.

“Once the applications are screened, then only will they reach the managers for approval. It will be put in place either by an external agency or internally,” he added.

LICHF sanctioned loans worth Rs 5,785 crore during the third quarter ended December 31, 2010, and its total loan book was around Rs 46,380 crore.

VK Sharma, CEO LICHF, refused to divulge details of the proposed plan. He admitted the company was working on certain aspects which would be taken up with the board shortly.

“We are trying to build capabilities in the organisation to sustain growth. We are working on certain aspects pertaining to internal set-up and risk assessment model, but it has to approved by the board,” Sharma said.

In November, the Central Bureau of Investigation arrested the ex-CEO of LIC Housing Finance, RR Nair, and six other senior bankers in connection with a multi-crore housing-finance racket.

The officials allegedly overlooked regulatory guidelines and sanctioned large loans to corporate houses while working in collusion with loan arranger firm Money Matters, for personal monetary gains.

(HT)

Popularity: 1% [?]

‘While there is deceleration in growth, inflation is a bigger problem’

When Duvvuri Subbarao took charge as the twenty-second governor of the Reserve Bank of India (RBI) in September, 2008, he had to act swiftly to counter the impact of the global economic slowdown on the Indian economy.

Subbarao’s first eight months in office saw RBI reducing its repo rate six times and reverse repo rate four times, to support a slowing domestic economy. Repo rate was reduced 475 basis points and reverse repo rate 275 basis points during this period.

“When asked what he thought of the French Revolution, Mao Zedong had famously replied: It is too early to tell. People who take a long view of history, like Mao, take the position that it is just too soon to draw the lessons of the crisis,” Subbarao said on Friday in his welcome remarks at the start of the third PR Brahmananda Memorial Lecture by Stanley Fischer, governor of the Bank of Israel.

“Policy practitioners do not have the luxury of historians; they have to respond to unfolding developments in real time,” Subbarao added.

It appears that RBI’s efforts to pull the domestic economy out of slumber have succeeded, as India’s gross domestic product (GDP) growth is seen accelerating to 8.6 per cent in the current financial year. The country’s economy had expanded 8 per cent in 2009-10 and 6.8 per cent in 2008-09.

However, inflation appears to be playing the spoilsport, with the headline number climbing to 8.4 per cent in December, driven by high food prices. The central bank has also revised its inflation forecast for March to 7 per cent from 5.5 per cent earlier.

Rising prices have prompted RBI to raise its key policy rates seven times since March 2010. The repo rate has been raised 175 basis points to 6.5 per cent, while the reverse repo rate was raised 225 basis points to 5.5 per cent during this period.

Things have become complicated, as the growth in India’s industrial output in December slid to a 20-month low of 1.6 per cent. Earlier this week, in Bhopal, Subbarao had admitted that balancing growth and inflation was a tough act.

“We want to set interest rates in a way that inflation can be contained without hampering the growth rate. But, this is not going to be an easy balancing act to resort to,” he had told reporters.

Most analysts reckon slow growth in industrial production is unlikely to convince RBI to keep rates unchanged in its next policy meet, due on March 17, as inflation continues to remain a major concern.

“While there is a deceleration in growth, inflation is a bigger problem… we thus maintain our view of the RBI raising (rates) by an additional 50 basis points in 2011 and 2012,” Rohini Malkani and Anushka Shah, analysts with Citigroup Global Markets, said in a note.

Goldman Sachs expects RBI to increase rates 25 basis points in March and another 50 basis points in this calendar year.

Some analysts, who did not wish to be named, however, said it was too early to take a long-term view on the direction of interest rates, with food inflation cooling to a seven-week low of 13 per cent for the week ended January 29 and growth in industrial production faltering.

A further slowdown in investment activities, coupled with easing food prices, might encourage RBI to take a pause before raising rates again, they said.

Subbarao, himself, believes that the central bank’s policy should take into consideration the present macroeconomic challenges.

“The central bankers were a triumphant lot in the years before the crisis…. The crisis then came as a serious blow to the credibility of central banks… the challenge for central banks, as indeed for all policy makers, is to learn the lessons of the crisis and reflect them in their policies,” Subbarao said.

(HT)

Popularity: 1% [?]

Bank of India has raised $750 million by issuing Reg-S international dual tranche bonds to support overseas operations. The issue includes bonds worth $500 million and $250 million maturing in 2021 and 2015, respectively. This is part of its overall $2-billion medium-term note (MTN) programme launched in 2005. Of this, it has already raised $1 billion.

The money will be used to fund the bank’s international business. “The issuance will enable us to provide liquidity for our existing bonds and also fund long-term assets,” said chairman and managing director Alok Misra. The bank has 29 branches and five representative offices abroad.

With funds getting expensive in India, public sector banks have increasingly started tapping opportunities abroad. State Bank of India, the country’s largest lender, had raised $750 million via MTN in November while Bank of Baroda, Indian Overseas Bank, IDBI Bank and Syndicate Bank are expected to do so by the end of the financial year.

Barclays Capital, Deustche Bank, HSBC, Royal Bank of Scotland and Standard Chartered acted as joint book-runners and lead managers for the issue.

(BS)

Popularity: 1% [?]

It is now possible for public sector bank employees to climb the career ladder faster. Keeping in mind the shortfall that is expected at the top in the coming years, banks are tweaking their human resource policies.

According to studies conducted by different banks, around 340,000 lakh employees will retire in the next 10 years. To compensate for this and support expansion, banks have to look at employing 500,000 to 700,000 people in the next 10 years.

To start with, some banks have introduced a fast-track promotion channel through which a deserving employee can rise much faster as compared to the traditional route.

Union Bank of India’s fast track channel can promote a scale-1 employee to scale-5 in 11 years.

“Thus, if a person joins our bank at the age of 23-25 years, he/she can be an assistant general manager by the age of 35-40,” said Chairman and Managing Director M V Nair.

The bank has promoted 548 employees through this system in the last four financial years. “This amounts to 11 per cent of total promotions in the period,” said Nair.

To take the shorter route, an employee must clear written tests, group discussions and personal interviews. If cleared, he/she becomes eligible for a higher position earlier than the time taken through the traditional route.

Other than this, the bank has been recruiting laterally in a big way. In the last three years, it has employed 5,000 people laterally.

Bank of Baroda has also introduced a fast-track promotion channel. “Currently, the average age at the general manager level is 50 years. Fast-track promotions will help bring this down by around 10 years,” said General Manager Ulhas Sangekar.

The retirement age for bank employees is 60 years. Faster promotions will increase the number of candidates eligible for higher posts.

Apart from this, BoB is in talks with business schools for tailor-made courses. “Once that is done, our bank can recruit the entire lot of students who undergo the course designed for our bank,” said Sangekar. Usually, BoB employees undergo specialised post-recruitment training.

The committee under Anil Khandelwal, the former chairman of BoB, to look into issues related to human resources in public sector banks had pointed out that in the next five years, 80 per cent general managers, 65 per cent deputy general managers, 58 per cent assistant general managers and 44 per cent chief managers would retire.

To address the issue, the committee had proposed a comprehensive strategy for succession planning and leadership development.

(BS)

Popularity: 1% [?]

Deposit mobilisation higher than loan disbursements in fortnight ended Jan 28.

Banks’ efforts to mobilise deposits have paid off. Banks raised Rs 37,730 crore deposits in the fortnight ended January 28, the highest since November. According to the latest data released by the Reserve Bank of India (RBI), deposit growth in the last one year has been close to 16 per cent while credit has grown 23 per cent.

With most banks raising deposit rates this month, bankers expect deposit mobilisation to gain further momentum.

“Banks are always looking for more deposits. Every bank has raised deposit rates on hope the growth will pick up. But so far, the demand has not really gone up. We expect deposit growth to rise in the coming weeks,” said Anil Girotra, executive director, Andhra Bank.

In the third quarter review of the monetary policy on January 25, the central bank had raised concerns over the high incremental credit-deposit ratio and asked banks to beef up deposit mobilisation to match the loan offtake.

After the policy, banks increased interest rates on deposits as well as on loans. IDBI Bank, Bank of Baroda, Union Bank have raised deposit rates by 25-150 points since early February. Old generation private sector lender Lakshmi Vilas Bank’s peak rate is 10.10 per cent for deposits with a maturity of one year to less than two years.

The gap in the growth of credit and deposit is more than what the central bank had projected. The growing gap between credit and deposit could lead to an asset-liability mismatch for banks. RBI had projected 20 per cent and 18 per cent growth in credit and deposit, respectively, for the current financial year.

“The gap in credit and deposit growth is becoming uncomfortable. The Reserve Bank of India has clearly explained that it is going to keep a watch on banks where the incremental CD ratio is over 100 per cent. Such banks may have to slow credit disbursements. Our CD ratio is about 70 per cent, which is below the industry average of 75 per cent. Our incremental CD ratio is also below 100 per cent. So, for us there is no such problem,” said SC Kalia, executive director, Union Bank of India.

(BS)

Popularity: 1% [?]

Akula urges RBI intervention, says difficult to continue if restrictive law remains.

SKS Microfinance may consider pulling out of Andhra Pradesh if the state government does not revoke its recent restrictive legislation on microfinance institutions (MFIs) by April 1.

“Until RBI (Reserve Bank of India) steps in and does something on the AP Act, we are going to see some uncertainty. The committee (Malegam panel, which recently gave a report on the issue to RBI) has given seven reasons why the state government should not have its Act. The committee has also said April 1 is when it would like to see these recommendations in place,” said Vikram Akula, chairman of SKS Microfinance.

“However, in case the situation does not get resolved, we may have to severely downsize our exposure in Andhra Pradesh or even, in the worst-case scenario, consider pulling out of the state,” he added.

Andhra Pradesh accounts for 24.5 per cent of the portfolio of SKS Microfinance, which was around Rs 5,000 crore as on December 31, 2010. Since the controversy over high rates charged by MFIs and the new law broke out late last year, the recovery rate of SKS in the state has dived to 42 per cent as against the rest of the country’s average of 98 per cent. The state also accounted for 70 per cent write-offs and provisions. For Andhra, the latter totalled Rs 58 crore as on December 31, he said.

“Even considering the worst-case scenario (pulling out from Andhra Pradesh), where there were significant losses, we would still be left with a strong and well-capitalised balance sheet. We still have strong operations in 18 states,” Akula said. “We have no cash flow issues. Despite the turmoil, we have been able to make all repayments to banks. On Thursday, the Reserve Bank of India, because of certain allowances on provisioning norms, has encouraged banks to continue to lend. We see continued support from our bankers.”

Last year, the Andhra Pradesh Assembly, in a bid to regulate MFIs, approved an ordinance that curbed operations of MFIs. It took effect in October 2010 as the AP Micro Finance Institutions (Regulation of Money Lending) Act and imposed stringent regulations in response to complaints over high interest rates and dodgy loan recovery practices.

Additionally, it curtailed the activities of MFIs in the state, which has been their largest single market in India.

(BS)

Popularity: 1% [?]