With reference to "Changing lending landscape" (August 29), the Reserve Bank of India's (RBI) move to develop a robust corporate bond market is in line with the international banking trends. A strong and deep bond market will hasten the process of disintermediation (read corporates ignoring lenders). That would be tantamount to an indirect admission by lenders that they do not have the skill set to vet corporate loan proposals. It has taken more than 40 years for the RBI and Indian lenders to realise that they lack appraisal and follow-up skills in corporate lending and that the time has come to develop a vibrant bond market. Over time, lenders have been experimenting with their credit portfolio. Some banks had 30-70 per cent exposure to corporate/retail sectors. Some others experimented with the reverse exposure. That amply proves that lenders have not been able to realise their strengths and adopted a trial-and-error method. That has cost them in terms of a huge pile-up of bad assets. Even after 40 years of nationalisation, public sector lenders have not been able to identify their strengths.
Even after the recent huge clean-up bids by public sector banks, FY17's first quarter saw a jump in bad assets. That has perhaps prompted the banking regulator to accelerate the process of strengthening the bond market. Low-rated companies may be able to access the bond market. But their cost of borrowing would be quite high compared to their credit costs from banks. Further, the market is quite ruthless in appraisal, and so low-rated companies' bonds may remain unsubscribed to a large extent. These companies somehow managed to procure funds from banks due to the absence of a rigorous credit appraisal. But they will not be able to play the same game in the bond market.
Assuming the RBI succeeds in developing a vibrant bond market, what is the road map for lenders? They have to expand their retail lending and concentrate on lending to mid-cap companies. Retail lending skill set is ordinary and only a routine appraisal and follow-up format is helping lenders to recover dues. When it comes to corporates, mid- or large-cap, skill sets are quite different. Lenders' individual exposure is quite less in the mid-cap sector, and their credit losses would be quite high and spread across sectors.
K V Rao Bengaluru
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