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C O N T E N T S Red
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vote for the future Making
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‘R’ for restraint Overcoming
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Kamath admits that the bank too is taking it somewhat easy when it comes to lending to individuals. “There are signs of an increase in defaults,” he says. Bank of India isn’t the only one hesitant to step up retail lending. Observes S A Bhat, CMD, Indian Overseas Bank, “The bank has deliberately slowed down on lending to the retail segment because we want to re-balance our portfolio.” As Macquarie’s Sen explains, “A part of the slowdown was in line with the intentions of the central bank to keep the economy from overheating. Also, when the excess SLR (securities that banks hold in accordance with regulations) in the system ran out, a tapering off of credit growth was bound to happen given the supply side constraints.” Adds an industry watcher, “With deposits not expected to rise any faster than they were, the credit-deposit ratio was looking to stabilise.” Besides, several banks have been a little short of capital and perhaps don’t feel it would be prudent to overstretch themselves. More than the slowdown itself, banks are worried about non-performing assets. With the bulk of home loans having been given at a floating rate, banks are now beginning to see defaults as borrowers struggle to pay their EMIs, whether for home or car loans. Says Bhat, “The gross and net NPAs may have been coming down as a percentage of assets. But are they coming off in absolute terms?” Bhat wonders what will happen when assets, that were seeing high growth and consequently keeping the NPA percentage in check, begin to grow more slowly? However, it must be said that the capacity of Indian banks to absorb losses is far higher now than a decade ago. This is mainly because most banks have been mopping up capital both in the home and foreign markets. A report by rating agency Fitch points out that consequently, the net NPL/equity ratio that had reduced to less than 10 percent at the end of FY07, should prove to be more resilient than asset quality ratios. The report also notes that Indian banks have not been impacted by the sub-prime crisis because of the lack of exposure to these markets. Nonetheless, the resulting widening of credit spreads had led banks to postpone plans to issue hybrid Tier I and Tier II capital in the international markets. Says SBI’s Bhattacharya, “Borrowing in the overseas market is becoming expensive with the rates hovering between 200-250 basis points above Libor.” About a year back, the rates were about 100-150 basis points above Libor. Indeed, Syndicate Bank is believed to have put on hold its $125 million Medium Term Note (MTN) issue because the pricing was not too favourable. Chairman and MD, CP Swarnkar, recently said he prefers to watch the situation and that unless the pricing was favourable, the bank would not go ahead with the issue. Global lenders, say investment bankers, are understood to be asking for loans to be priced at 300 basis points over the six-month Libor. Last year, Canara Bank had mopped up capital through the MTN route at 125 basis points over Libor. Given that they are lending at a slower pace this year, banks are already earning less. The net interest income has grown at a sedate 11 per cent and that could exerts pressure on net interest margins. Banks, therefore, need to compensate for this by making more from fees. As for asset quality, even if there is a deterioration, it should not get out of hand. Having cleaned up their balance sheets over the last few years, it would be a pity if they undid all the good work.• Business Standard • December 2007 |
