The financial sector’s catchphrase has changed from 'grow fast' to 'go slow'.
Two weeks back, Amiya Patel (name changed) received a call from his banker, urging him to pay his credit card due of Rs 5,000, now that it’s three days past the due date.
When Patel reached the branch of the public sector bank, he realised that he was not the only one getting pressing reminders from the bank – people with as little as Rs 500 overdue had received similar calls.
Gone are the days when banks would treat payment delays as part of life. Instead, they are taking measures to minimise chances of any kind of payment default by doing rigorous background checks.
For instance, while lending to sectors under pressure, such as non-banking finance companies and exporters, banks are disbursing loans only when a bank-appointed auditor authenticates the purpose. The same auditor is being asked to keep a check on regular fund flows and submit a report every month – without fail.
Account managers at banks go over companies’ quarterly updates with a fine-toothed comb to check for signs of distress.
Next up is the valuation of collaterals that promoters had given while availing of the loans. “If there is a large drop in the value, banks are asking for additional securities or funds from promoters,” said a risk management expert with a consulting firm. “Most of us are now trying to do what we didn’t in the last three-four years. It is back to basics now,” said a bank chief.
The “careful adjustments” have been prompted by the global financial turmoil that led to the fall of Lehman Brothers and the drubbing of Citigroup and AIG.
Liquidity in the domestic market has taken the biggest hit. With the option of overseas borrowing out of the window, Indian companies are making more demands on the banking system. Adding to the pressure is the companies’ diminishing cash flow as demand has come down in recent months.
| BUSINESS PERFORMANCE | |||||||||
| (Rs crore) | Advances | Deposits | Gross NPA | ||||||
| H1 FY ’08 | H1 FY ’09 | % chg | H1 FY ’08 | H1 FY ’09 | % chg | H1 FY ’08 | H1 FY ’09 | % chg | |
| SBI | 3,64,281 | 4,99,347 | 37.08 | 4,84,114 | 6,19,718 | 28.01 | 11,194 | 12,552 | 12.13 |
| ICICI Bank | 2,07,121 | 2,21,985 | 7.18 | 2,28,307 | 2,23,402 | -2.15 | 5,932 | 9,501 | 60.17 |
| PNB | 1,01,494 | 1,30,432 | 28.51 | 1,49,980 | 1,86,315 | 24.23 | 4,717 | 3,125 | -33.75 |
| HDFC Bank | 62,278 | 1,02,222 | 64.14 | 91,069 | 1,33,781 | 46.90 | 768 | 1,676* | 118.23 |
| BoB | 90,212 | 1,19,475 | 32.44 | 1,31,373 | 1,61,669 | 23.06 | 2,129 | 1,954 | -8.22 |
| * merger of Centurion Bank with HDFC Bank | |||||||||
With increased pressure, banks’ immediate response was to put a brake on lending. Confidence sunk so low that they even became wary of lending to each other.
In the initial weeks of panic, the cost of lending – even in the inter-bank call money market – went up to over 20 per cent as the system grappled with a liquidity crisis. The combined effect of the high demand for funds from oil companies, and a whopping Rs 40,000 crore moving to government coffers in the form of advance tax payments had accentuated the crisis.
“Gone are the days when we would wait for weeks to meet the general manager of a public sector oil company. Now, the CFOs are calling up seeking funds,” said the head of a financial institution.
Even banks such as ICICI Bank, which had come to be synonymous with 25-30 per cent growth, are now going slow. “On the retail side, there has been a natural moderation of demand given the high interest rates and high asset prices. The bank has tightened its credit norms for various products in the context of the high inflation and interest rate environment,” said ICICI Bank Joint Managing Director & CFO Chanda Kochhar.
Axis Bank President Parthasarthy Mukherjee said that the bank is observing caution while disbursing credit to the corporate sector. However, the demand is low in the wake of high interest rates.
“Until last year, our corporate credit growth used to be 50 per cent, this year it is 25 per cent. This is mainly because the bank is reducing its exposure to uncertain sectors such as real estate and others.” Over the last six months, Axis has maintained a modest growth in real estate lending. “Our total corporate lending would be around Rs 48,000 crore, which comprises Rs 5,000-6,000 crore to the real estate sector,” Mukherjee added.
Romesh Sobti, managing director and CEO, IndusInd Bank, said that “finding deposit at affordable rate is difficult. Any further measure by the central bank will mean a downward bias on interest rates.” He said that the private sector banks have not seen any significant reduction in the cost of funds so far. “Also, in the wake of higher defaults, banks would be required to take remedial actions in certain segments. For instance, if we assess higher defaults in credit card repayments by salaried class, we have to stop lending to the segment,” he explained.
However, Sobti added that project loans with prior commitments will get sanctions despite the crisis. But financing of fresh projects will be done on a “selective basis, after thorough risk assessments,” he said. The bank is also lending on a rolling basis up to periods of 12 months. “In demand loans, there is no dearth of liquidity. In some cases of defaults in corporate credit, we may be going for rescheduling in the tenure of loans. Going forward, the banks may also see more corporate debt restructuring,” he added.
With more pressure on banks for funds, credit growth since April 2008 – which was Rs 1,29,334 crore (5.5 per cent) before September 15, the day when Lehman filed for bankruptcy – shot up to Rs 1,80,554 crore (7.6 per cent) by September 26, 2008. It rose further to Rs 2,45,491 crore (10.4 per cent) by October 10, 2008.
The back-to-basics banking is also evident in the rush for retail deposits – a practice that was almost forgotten in the last few years.
But with liquidity drying up, companies had no option but to liquidate some of their deposits to meet their immediate cash requirements. Also, the finance ministry has been putting pressure on the public sector banks, which account for over 70 per cent of the business, to do away with bulk deposits so that lending rates could be reduced.
ICICI Bank, which was a major player in the bulk-deposit market, had decided as early as the fourth quarter of 2007-08 to stay away from these deposits as its lending growth targets had been scaled down.
Consequently, in the last few months one is seeing a situation where banks are offering 10.50-11 per cent on deposits with tenures of one year to three years. “Banks have to depend on raising deposits from retail customers as they are much stable and cost less in the longer run,” said Indian Banks’ Association CEO K Ramakrishnan.
| PROFITABILITY PARAMETER | |||||
| Net Profit (Rs crore) | Net Interest Margin (%) | ||||
| H1 FY ’08 | H1 FY ’09 | % chg | H1 FY ’08 | H1 FY ’09 | |
| SBI | 3,037 | 3,901 | 28.45 | 3.01 | 3.16 |
| ICICI Bank | 1,778 | 1,742 | -2.02 | 2.10 | 2.40 |
| PNB | 964 | 1,220 | 26.56 | 3.41 | 3.78 |
| HDFC Bank | 690 | 992 | 43.77 | 4.00 | 4.20 |
| BoB | 658 | 766 | 16.41 | 2.80 | 3.00 |
Even before the US crisis broke out, banks were running a credit-deposit ratio of over 75 per cent , forcing them to liquidate some of their investment in government securities to support lending. That put an end to “lazy banking” – where banks simply parked resources in safe havens such as statutory liquidity ratio bonds to earn safe returns.
The upheaval in the stock market also changed the financial sector’s investment strategy – treasury income was not something banks could rely on anymore.
On the lending side, the approach has become even more selective. Had it not been for the subprime-induced crisis, credit growth would have been closer to the Reserve Bank of India’s target figure of 20 per cent.
Retail loans have been impacted even more by the squeeze – there are fewer calls soliciting credit cards, personal loans or home loans.
“Over the last couple of quarters, we have seen moderation in the growth rate of retail loans while growth in corporate loans has been fairly stable… There has been some tightening of credit policies,” said HDFC Bank Executive Director Paresh Sukhtankar. As for corporate loans, new projects are not being planned.
Sobti said that banks have become wary of lending to certain sectors such as real estate and capital markets.
“Banks have maintained squeeze on lending to these sectors, which in turn may have affected the cash flows,” he said. On the retail lending side, personal loans, home loans, and credit cards have been affected, and banks will maintain caution in disbursing loans to such segments till default rates come down, he added.
While big corporate houses are unlikely to face as much pressure as some of the smaller counterparts, they cannot hope to remain unscathed. “The rate of lending is high right now. Theoretically, in tough times, big companies get more of the funds while the fight for capital for smaller companies gets tougher,” said Sanjay Nayar, CEO, South Asia, Citi.
In fact, the fight for capital has already begun. Small and medium enterprises (SMEs) are complaining about the pressure and want a host of changes in the lending practices and regulatory norms.
However, Allahabad Bank Chairman & Managing Director K R Kamath says that SMEs shouldn’t lose hope. “We can’t say we will not lend to SMEs. Banks will continue to lend to them. It is better to support them in difficult times than see the account becoming an NPA ( non-performing asset).”
The demand for working capital is rising. “Though risks in lending rise during a difficult economic climate, banks lend to enterprises across the sectors to minimise risk,” Kamath added.
