V Anantharaman took charge as the regional co-head of Standard Chartered Bank's wholesale banking business in South Asia in January. Currently, the share of wholesale banking in the bank's total income from India is estimated at 75 per cent. In an interview with Somasroy Chakraborty, Anantharaman shares the bank's strategy to increase this business in a challenging macro-economic environment. Edited excerpts:
Fears of yet another slowdown have intensified. How is the current funding environment? Are companies looking to postpone their expansion plans?
You need to distinguish between companies that have a clear medium to long-term strategy and those that don't. Some may decide to defer projects because of near-term issues, but that doesn't necessarily apply to all.
High interest rates clearly have a negative sentimental impact, which in turn affects markets, especially equity markets. The way markets have behaved lately, some companies may delay equity raising plans. That in turn, will have some effect on the financial closure of some large projects.
One of the alternate sources of funding is private equity and we have seen certain projects which recorded investments. But that is not as widespread and as broad as public equity markets.
With rising interest rates, debt capital has also become expensive. Are companies still looking to raise debts in the current environment?
I don't think there is an issue with debt funding. There is adequate liquidity in the system. In terms of tying up debts, I don't see any delay in securing approvals from financial institutions for those loans. Domestic banks typically meet the term loan needs of Indian companies. The appetite for long-term foreign currency project financing is also coming back selectively. It is slow and has not at the level where one would want it to be, but the appetite is certainly there.
Going forward, how do you plan to sustain growth in wholesale banking, since there are worries that corporate financing opportunities and the scope of managing mergers and acquisitions (M&As) may be limited?
A large part of the incremental growth in our wholesale banking business came from corporate finance that was fuelled by cross border M&A transactions. Large scale balance sheet restructuring and refinancing activities also aided our growth. But you should not downplay our strength in traditional flow businesses like transaction banking - trade financing and cash management.
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I think globally, the pace of growth in M&A deal volumes still continues. Indian companies are also looking for offshore acquisitions. Companies exploring acquisition opportunities are obviously impacted by higher funding costs. But acquisition plans are not driven only by funding scope, there are strategic needs. Dialogues with our clients on acquisition targets are still taking place.
On the inbound side, there is continued interest because western companies need to look for growth markets like India and China. Most multinational corporations are more comfortable with India than China because of the regulatory atmosphere, funding sources and accounting standards here. Those dialogues have actually increased.
Redemption of foreign currency convertible bonds (FCCBs) may prompt Indian companies to explore refinancing options in the next couple of years. Does this provide a business opportunity to Standard Chartered Bank?
There is an issue with redemption of convertible bonds. A number of them would be redeemed by the end of 2011 and 2012, or early 2013. This is because in 2007, FCCB issuances of Indian companies were the highest in Asia. Instruments with a five-year maturity period would be redeemed soon. Whether the companies would restructure these bonds after negotiating with the bondholders, we would have to wait and see. But I think most companies would find a way to refinance these bonds, which in turn would provide us business opportunities.
A number of foreign banks have recently set up operations in India. Would higher competition affect the margins of existing players?
Competition is certainly increasing, as a number of banks are looking at India and China, which present high growth opportunities. It is not just new players entering the market. Banks that are already present are also ramping up their operations. Margins have shrunk because of competition. In the first half of 2011, margins were pretty much in line with the second half of 2010. I'm not sure if the margins would shrink further, since ultimately, banks have to decide at what rates they want to lend. Banks cannot afford to incur losses on a sustained basis on their loans. We have to cover the cost of funds and make a decent return on assets.