New Kids Off The Blocks

THE primary issues market is all set to switch to second gear, with private banks at the wheel. After a protracted spell of stagnation, an avalanche of initial public offerings is in the offing. Reason: the end of a three-year deadline set by the RBI.In 1993, taking a cue from the Narasimhan Committee recommendations, 12 private banks were granted approval 'in principle', with a set of guidelines that included a minimum capital of Rs 100 crore. The clincher was a 40 per cent ceiling to be clamped on promoters' holdings after three years. The rest was to be issued to the public.

The harvest season is now upon us. This month alone, five new private sector banks are scheduled to hit the primary market to raise over Rs 200 crore in equity. In the queue for 1997 are UTI Bank, IndusInd Bank, ICICI Bank, IDBI Bank and Centurion Bank, with a total of Rs 500 crore of equity capital on offer. The new applicants are waiting for the market to settle before they charge the maximum possible price. Exulted a merchant banker: "Now that Chidambaram is back, the capital market is set to take off." Four of the early entrants—Global Trust Bank, HDFC Bank, TimesBank and Bank of Punjab—went public after one Photographs year of operation and had to offer their issues at par. Those scrips have already showed a healthy appreciation, though general market sentiments have been depressed for the last two years.

The new entrants, having completed three years of operations, can now ride that crest and price their issues at a premium. HDFC Bank is today priced at Rs 55-60, while Bank of Punjab is quoted at Rs 15-18 and GTB at Rs 35-40. An average annual appreciation of 20 per cent is far higher than what any index has achieved in recent years. The potential entrants have not yet decided on the date, size or pricing of issue.

Other factors, too, will lend a bullish flavour to the downcast primary market. First, the euphoria over the Budget, the exim policy and the credit policy. The new policy initiatives have widened the field for the country's dull and staid banking industry. Says A.K. Dham, executive director, UTI Bank: "The traditional business of corporate credit, forex and merchant banking activities is still our bread and butter. Yet, new businesses like investment trading and treasury management are catching up." And the dessert plate is now bigger with margins shooting up in non-traditional banking areas. Says P. Sukhtankar, vice-president (credit and market risk), HDFC Bank: "We have broadbased revenue sources, including a clear focus on fee-based activities."

Despite the liquidity and the general economic slowdown last year, most of the private banks  have performed extremely well. Says Ashish Sen, managing director, Centurion Bank: "In terms of business (deposits and advances) the new banks are still only marginal players, commanding less than two per cent market share. However, in terms of income and net profits, they have wrested more than their proportionate share: 2.4 per cent of the total income and almost 17 per cent of the total net profit earned by the banking system as a whole. " Notes the Indian Banking Review (1995-96): "One instance clearly demonstrated the strength of emerging competition. It took eight years for old private sector banks to gain one per cent in market share of deposits. The new private sector banks made it in a year." In 1995-96, five private banks saw a doubling of their deposits.

Private bank scrips are, naturally, the flavour of the month. Says George Thomas, director, Fiduciary Capital Services Ltd: "Most private sector banks that are listed are quoting far above the issue price at a time when thousands of other scrips are quoting under par or at discounts."

However, bankers worry whether investor interest in the banking industry would spill over to new corporate issues. Over 2,000 firms, many of which had issued capital at a premium, are quoting below par on the BSE. Says Dham: "We may want to phase out our issue. As per RBI stipulations, we can offload 25 per cent in the first go and the rest later." UTI Bank, which has completed three years, will probably be first off the block. It needs to capitalise Rs 185 crore for the required 40 per cent promoters' stake. That would mean an initial issue of Rs 40-50 crore. Close on their heels are IndusInd Bank, ICICI Bank and IDBI Bank, with a proposed issue size of Rs 40 crore each, while Centurion Bank is planning an issue of Rs 37 crore.

IndusInd Bank's fee-based income is estimated to cross 20 per cent of its total income. "The bank is keen to get into money market mutual funds," says vice-president Rajiv Butalia, before the slack season credit policy threw open the money markets. UTI Bank's forte has been merchant banking activities. During 1995-96, it underwrote 44 issues, involving over Rs 232 crore. Centurion Bank plans to focus on trade financing and foreign exchange services with help from its 27 per cent equity partner, the Keppel Group of Singapore. ICICI Bank boasts of a high 30 per cent non-fee based income. HDFC Bank has set up a sophisticated dealing room to handle transactions in the treasury division.

Explains Dham: "The single most important factor why these private banks have succeeded is customer service, an area traditionally ignored by most Indian banks." Indeed, almost all the nine banks are setting a benchmark in institutional and retail banking. All the banks have online links. Some are linked through a Wide Area Network. New branches will be linked in real-time online connectivity. Which means a cheque deposited at a Mumbai branch can be encashed immediately after in Kochi. 

The biggest plus point is the banks' high capital adequacy ratio. The RBI has stipulated that against every Rs 100 of assets, the minimum capital of the bank should be Rs 8. The capital adequacy ratios of the private banks, between 16 and 30 per cent, are way above the norms. A lean though expensive workforce, growing opportunities due to increasing deregulation, and a technology edge have put them on the forefront of the banking industry revolution. 

However, the rapid growth may be taking its toll. A new private bank has to spend over Rs 1 crore per branch, compared to only 30 per cent of this incurred by a public sector bank. Also, the RBI stipulation of reducing the promoters' stake to 40 per cent, over the high capital adequacy norms, may overcapitalise the banks. "Those with a capital base of over Rs 150 crore realise that being overcapitalised is a bane, as the capital has to be serviced," says P.H. Ravi Kumar, vice-president (treasury and forex), ICICI Bank.

The new crop of banks will increase the pressure of competition for foreign banks and established private sector banks. "The old private sector banks have a wide network of branches in semi-urban and rural areas and are in touch with a huge retail fund base that is reasonably less volatile. But, a small equity base and scattered promoters' holdings make them highly vulnerable to takeovers."

 Clearly, the re-entry of private banks promises to give industry the element of uncertainty that disappeared with bank nationalisation. Add the credit policy, and in a couple of years the banking scene may be never be the same again.