Not Interested

LAST month, an Aurangabad-based engineering firm received a query from a Thai export house about a large consignment of alloy gaskets. Some three years ago, a spate of similar orders had forced the company to import brand new machinery worth Rs 20 crore. Almost the entire cost was borne by bank borrowings. Then came the slowdown in both export orders and domestic demand: the company has been unable to repay even the interest on the loan every year. Instead, working capital loans have risen further. So last month, when the owner visited his bank for another Rs 10-crore working capital loan for the Thai order which would translate to a roughly Rs 30-crore profit, the bankers refused. With the Thai economy itself in doldrums, even the export order could not be properly trusted. Last week, the promoter finally informed the Thai company of his inability to meet the order.

India's corporate backyard is currently littered with such tales of woe. "What's worse, you can neither blame the bankers nor the corporates for such cul-de-sacs," says the executive director of a nationalised bank. That there has been a slowdown in certain sectors of the economy is well-established. Many corporate houses—big and small—are finding it extremely difficult to service their debt.

At the same time, banks are flush with cash. Deposits have been growing every month. Over June 1997, deposits increased by 18 per cent in May this year, reaching a whopping Rs 61,545 crore. At the same time, bank credit to the commercial sector is on a decline. In May, it was only 68.5 per cent of bank deposits. The 1997-98 bank results are indeed a cause for worry. While profits of 29 major banks have jumped by over 40 per cent, there isn't much to cheer. The deposit growth for the banking industry during 1997-98 was way ahead of the growth in advances at 15.5 per cent, according to figures released by the RBI.

Indeed, the pressure on spreads for the banks—the difference between interest earned on loans by banks and interest paid on deposits—has been increasing. In all cases, spreads declined last fiscal year or, at best, remained stagnant as banks competed to attract short-term deposits. By reducing the interest rates and the cash reserve ratio, the RBI has put further pressure on banks. They had to slash lending rates following an increase in liquidity, but could not reduce deposit rates for fear of losing customers. Says Rajiv Verma, banking analyst at W.I. Carr: "The structure of Indian banking is such that spreads come under pressure when the rates drop. SBI has been the most vulnerable in this matter because of the large proportion of long-term deposits which it has not been able to re-price, despite falling lending rates."

It's a strange situation: top-rated companies can easily borrow from banks, but they have access to even cheaper alternatives like external commercial borrowings (ECBs), private placement and commercial paper, while small and medium-sized corporates which need funds most are starved of resources. These corporates attribute stringent pre-disbursement conditions set by the financial institutions to be largely responsible for their inability to get funds against even those loans that are already sanctioned. Some banks and institutions also demand promoter's contribution upto 75 per cent of the project cost. "If we had that kind of money, we wouldn't need any loans," says a victim promoter.

The bankers, in turn, blame the history of India's smaller companies. Explains a consultant to a leading private bank: "Several companies had overstretched their capacities expecting a higher rate of economic growth. More pertinently, they raised huge amounts from stockmarkets and banks to put up large projects. Many smaller and midsize companies took the investing public for a ride during the primary market boom. Promoters are known to have run away. It would be worse if the banks did not ensure their commitment."

Today when the bottom has fallen out of the stockmarket and over 3,000 companies are trading below or at par, the investing public is finding it safer to put their money in banks and earn between 8 and 10 per cent rate of interest. That's why deposits are growing so fast. Banks need to lend this cash out to make a profit, but memories of all those bad loans are still fresh. And blue-chip companies with high credit ratings cannot use all the funds available with the banks either due to the recessionary environment or because they are already cash-rich.

Banks are now trying to find novel modes of investment for their surplus cash. For instance, overseas money markets, where returns from short-term instruments are at least 150-200 basis points (1.5 to 2 per cent) higher than those on similar domestic instruments. But as per RBI guidelines, banks can only deploy funds to the extent of their nostro limits (non-resident deposits plus the overseas investment limits which is 15 per cent of the banks' net worth or US $10 million, whichever is higher). Says S. Gopalkrishnan, executive director of Bank of India: "To take advantage of the integration of money, forex and gilt markets, we have started an integrated treasury branch. We are also taking steps to integrate the bank's dealing room worldwide to have a global treasury in Mumbai."

The government is not unaware of the problems. One way it is trying to tackle the situation is by giving banks far greater freedom. Says K. Kannan, chairman-cum-managing director of Bank of Baroda: "To cut down on bad debts and for the recovery of loans, the RBI has decided to offer banks a broad set of directives within which they can determine an approach for recovery of overdue loans best suited for the bank."

The finance ministry has already clarified that there will be no end-use restrictions on banks wishing to invest in bonds floated by companies, even if they are meant for takeover of companies. Several mergers and takeovers may now be initiated by banks themselves. For example, several mid-size cement companies which are unable to pay off their loans are almost expecting their banks to find a white knight for them. "Such need-based merger activities prompted by Indian banks might yet become a trend," says Anand Vasudevan, banking analyst at UTI Securities.

The SBI has also launched the "general purpose corporate loan", a normal banking procedure in developed markets. It has cleared a Rs 200-crore seven-year loan to ITC for which the end use is not specified. The interest charged on such loans will be higher than normal term loans. However, analysts fear that even if this becomes a trend, such loans will only be given to bluest of the blue chips. This won't solve the problems of the mid-cap and smaller corporates. Having realised that the small-scale sector was the worst hit by the tightening of bank's credit, the RBI had set up a one-man high-level committee headed by S.L. Kapur, former secretary in the industry ministry, to suggest steps for improving the delivery system and simplification of procedures for credit to SSIs. While the committee submitted its report to the RBI on June 30, it was only last week that the RBI accepted 35 of its 126 recommendations.

Bank branch managers will now have more power to grant ad hoc limits, and banks will now be free to decide their own norms for assessment of credit requirements. Loan limits have also been raised—application forms prescribed for loans up to Rs 2 lakh can now be used for Rs 10 lakh loans and those for Rs 50 lakh and more can now be used to ask a loan up to Rs 2 crore. The central bank has also asked banks to delegate powers to branch managers to grant ad hoc facilities to the extent of 20 per cent of the limits sanctioned. The most important part of the recommendations, however, is RBI's circular to the banks that the flow of credit to SSIs will now be assessed by using data on disbursement rather than outstanding balances. Banks have, therefore, been advised to shore up their disbursement targets along with their outstanding balances.

 Will all this be enough? Some are sceptical. For example, M.S. Verma, chairman, SBI, who says banking in India in the next millennium will be very different from what we have been used to till now: "By changing procedures and interest rates, we might get some incremental advantage. To change the growth rate, we have to look at strategic issues rather than procedural ones." In other words, response of a totally different order.